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Explicit caplet implied volatilities for quadratic term-structure models

Matthew Lorig

https://orcid.org/0000-0001-5307-3447

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

E-mail Address: mlorig@uw.edu

Corresponding author.

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and

Natchanon Suaysom

https://orcid.org/0000-0002-2642-4982

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

E-mail Address: nsuaysom@uw.edu

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https://doi.org/10.1142/S242478632350041XCited by:0 (Source: Crossref)

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.

Keywords:

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