Linear-Rational Term Structure Models With Flexible Level-Dependent Volatility

Master Thesis

2018

Permanent link to this Item
http://hdl.handle.net/11427/29215
Files
thesis_com_2018_schwellnus_adrian.pdf (1.13 MB)
Authors
Schwellnus, Adrian
Supervisors
Backwell, Alex
Journal Title
Link to Journal
Journal ISSN
Volume Title
Publisher
Publisher

University of Cape Town

Department
African Institute of Financial Markets and Risk Management
Faculty
Faculty of Commerce
License
Series
Abstract
The Linear-Rational Framework for the modelling of interest rates is a framework which allows for the addition of spanned and unspanned factors, while maintaining a lower bound on rates and tractable valuation of interest rate derivatives, particularly swaptions. The advantages of having all these properties are significant. This dissertation presents the Linear-Rational Framework, and specializes the factor process to a class of diffusion models which allows for the degree of state dependence of volatility to be estimated. This dissertation then finds that the estimated state dependent volatility structure is significantly different to that of typical models, where it is set it a priori. The effect the added degree of freedom has on the model implied swaption skew is then analysed.
Description
Keywords
Mathematical Finance

Reference:

Schwellnus, A. 2018. ETD: Linear-Rational Term Structure Models With Flexible Level-Dependent Volatility. University of Cape Town.

Collections
Masters