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Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption

Author

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  • Xiangfeng Yang

    (University of International Business and Economics)

  • Hua Ke

    (Tongji University)

Abstract

In the framework of uncertainty theory, this paper investigates the pricing problem of American swaption. By assuming that the floating interest rate obeys an uncertain differential equation, the pricing formula of American swaption is derived. Furthermore, parameter estimation of the uncertain interest rate model is given, and the uncertain hypothesis test shows that the uncertain interest rate model fits the Shanghai interbank offered rate well. Finally, as a byproduct, this paper also indicates that stochastic differential equations cannot model real-world interest rates.

Suggested Citation

  • Xiangfeng Yang & Hua Ke, 2023. "Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption," Fuzzy Optimization and Decision Making, Springer, vol. 22(3), pages 447-462, September.
    • Handle: RePEc:spr:fuzodm:v:22:y:2023:i:3:d:10.1007_s10700-022-09399-8
    DOI: 10.1007/s10700-022-09399-8
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    References listed on IDEAS

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    1. Tingqing Ye & Baoding Liu, 2022. "Uncertain hypothesis test with application to uncertain regression analysis," Fuzzy Optimization and Decision Making, Springer, vol. 21(2), pages 157-174, June.
    2. Jagannathan, Ravi & Kaplin, Andrew & Sun, Steve, 2003. "An evaluation of multi-factor CIR models using LIBOR, swap rates, and cap and swaption prices," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 113-146.
    3. Waichon Lio & Baoding Liu, 2021. "Initial value estimation of uncertain differential equations and zero-day of COVID-19 spread in China," Fuzzy Optimization and Decision Making, Springer, vol. 20(2), pages 177-188, June.
    4. Jaehyuk Choi & Sungchan Shin, 2016. "Fast Swaption Pricing In Gaussian Term Structure Models," Mathematical Finance, Wiley Blackwell, vol. 26(4), pages 962-982, October.
    5. Kai Yao & Baoding Liu, 2020. "Parameter estimation in uncertain differential equations," Fuzzy Optimization and Decision Making, Springer, vol. 19(1), pages 1-12, March.
    6. Damir Filipović & Yerkin Kitapbayev, 2018. "On the American swaption in the linear-rational framework," Quantitative Finance, Taylor & Francis Journals, vol. 18(11), pages 1865-1876, November.
    7. Yu, Yongjiu & Yang, Xiangfeng & Lei, Qing, 2022. "Pricing of equity swaps in uncertain financial market," Chaos, Solitons & Fractals, Elsevier, vol. 154(C).
    8. Damir Filipovic & Yerkin Kitapbayev, 2016. "On the American swaption in the linear-rational framework," Papers 1607.02067, arXiv.org, revised Feb 2018.
    9. Chen Xiao & Yi Zhang & Zongfei Fu, 2016. "Valuing Interest Rate Swap Contracts in Uncertain Financial Market," Sustainability, MDPI, vol. 8(11), pages 1-10, November.
    10. Yang, Xiangfeng & Liu, Yuhan & Park, Gyei-Kark, 2020. "Parameter estimation of uncertain differential equation with application to financial market," Chaos, Solitons & Fractals, Elsevier, vol. 139(C).
    11. Lu, Jing & Yang, Xiangfeng & Tian, Miao, 2022. "Barrier swaption pricing formulae of mean-reverting model in uncertain environment," Chaos, Solitons & Fractals, Elsevier, vol. 160(C).
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    Cited by:

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    6. Weiwei Wang & Dan A. Ralescu & Panpan Zhang, 2024. "Valuation of convertible bond based on uncertain fractional differential equation," Fuzzy Optimization and Decision Making, Springer, vol. 23(4), pages 513-538, December.
    7. Jinran Chen, 2024. "Prediction of global trade network evolution with uncertain multi-step time series forecasting method," Fuzzy Optimization and Decision Making, Springer, vol. 23(3), pages 387-414, September.
    8. Xiaoxia Huang & Xue Meng & Xiaozhu Xu, 2024. "Portfolio selection with second order uncertain dominance constraint," Fuzzy Optimization and Decision Making, Springer, vol. 23(4), pages 561-575, December.
    9. Yang Liu & Zhongfeng Qin & Xiang Li, 2024. "Are the queueing systems in practice random or uncertain? Evidence from online car-hailing data in Beijing," Fuzzy Optimization and Decision Making, Springer, vol. 23(4), pages 497-511, December.
    10. Liu, Yang & Lio, Waichon, 2024. "Power option pricing problem of uncertain exponential Ornstein–Uhlenbeck model," Chaos, Solitons & Fractals, Elsevier, vol. 178(C).

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