Publication Type

Conference Proceeding Article

Version

acceptedVersion

Publication Date

12-2018

Abstract

Efficient risk managing of swaption portfolios is crucial in the hedging of interest rate exposure. This paper formulates a portfolio risk management framework under stochastic volatility models. The implication of using the right volatility backbone in the stochastic-alpha-beta-rho (SABR) model is analyzed. In order to handle negative interest rates, we derive a displaced-diffusion stochastic volatility (DDSV) model with closed-form analytical expression for swaption pricing. We demonstrate that the dynamics naturally allow for negative rates, and is also able to fit the market well. Finally, we show that choosing the right backbone in the DDSV model results in optimal hedging performance and P&L explanation.

Keywords

derivatives valuation, stochastic volatility models, interest rate markets, swaptions, risk management, portfolio management, pricing and hedging

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

SFM 2018: Conference on the Theories and Practices of Securities and Financial Markets, December 7-8

First Page

1

Last Page

31

Publisher

SFM

City or Country

Kaohsiung, Taiwan

Copyright Owner and License

Authors

Additional URL

http://www.sfm.url.tw/php/Papers/CompletePaper/042-1399737391.pdf

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