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Explicit caplet implied volatilities for quadratic term-structure models

Author

Listed:
  • Matthew Lorig

    (Department of Applied Mathematics, University of Washington, Seattle, WA, USA)

  • Natchanon Suaysom

    (Department of Applied Mathematics, University of Washington, Seattle, WA, USA)

Abstract

We derive an explicit asymptotic approximation for implied volatilities of caplets under the assumption that the short-rate is described by a generic quadratic term-structure model. In addition to providing an asymptotic accuracy result, we perform numerical experiments in order to gauge the accuracy of our approximation.

Suggested Citation

  • Matthew Lorig & Natchanon Suaysom, 2024. "Explicit caplet implied volatilities for quadratic term-structure models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-28, March.
    • Handle: RePEc:wsi:ijfexx:v:11:y:2024:i:01:n:s242478632350041x
    DOI: 10.1142/S242478632350041X
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