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- Title
CMS Spread Options Pricing under the CHH Model.
- Authors
Chen, Ren-Raw; Li, Xiaowei; Hsieh, Pei-Lin
- Abstract
Based on the Chen, Hsieh, and Huang (2017) interest rate model, this research explores the analytical approach for pricing CMS spread options. We first derive a complex joint density for two swap rates composed of sequential forward rates and approximate the joint density by bivariate normals. After applying the methods of Pearson (1995) and Li, Deng, and Zhou (2008), we obtain two analytical pricing models and examine their accuracy using numerical analysis. Finally, we empirically show the predictive power of the implied volatility of CMS options for future economic states.
- Publication
Journal of Fixed Income, 2023, Vol 32, Issue 4, p83
- ISSN
1059-8596
- Publication type
Academic Journal
- DOI
10.3905/jfi.2023.1.155