The paper extends Amin and Morton (1994), Zeto (2002), and Kuo and Paxson (2006) by considering jump-diffusion model of Das (1999) with various volatility functions in pricing and hedging Euribor options across strikes and maturities. Adding the jump element into a diffusion model helps capturing volatility smiles in the interest rate options markets, but specifying the mean-reversion volatility function improves the most. A humped volatility function with the additional jump component yields better in-sample and out-of-sample valuation, but level-dependent volatility becomes more crucial for hedging. The specification of volatility function is more crucial than merely adding jumps into any model and the effect of jumps declines as the maturity of options is longer.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Mar 12, 2010
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
All the latest content is available, no embargo periods.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud