In mathematical finance , the SABR model is a stochastic volatility model, which attempts to capture the volatility smile in derivatives markets. The name stands for " stochastic alpha , beta , rho ", referring to the parameters of the model. The SABR model is widely used by practitioners in the financial industry, especially in the interest rate derivative markets. It was developed by Patrick S. This is one of the standards in market used by market participants to quote volatilities.
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The key tests for implied vols on option prices, relate to their pdf probability density functions. The Hagan expansion allows us to have a analytical form, by which one can compute the implied vols, and subsequently feed that into a Black76 equation. If the test is for a non-arbitrage condition i. The 2nd key test though, is when the implied vol surface is calibrated such, is it consistent with the volatility behaviour as it will be fed into other models, and more exotic products?
Now, if that is successful, is the vol surface and parameters then fed into other more complicated models such as a short-rate model with vol-skew?
If yes, but SABR negative-beta creates wrong usually forward vols behaviour, then that's when one has a problem. This gives horizontal backbone of the vol surface. I think it all depends on whether this is what you expect to see - the vol surface is stickey under shocked price scenarios. Sign up to join this community. The best answers are voted up and rise to the top. Home Questions Tags Users Unanswered.
Asked 1 year, 8 months ago. Active 8 months ago. Viewed times. Pim Pim 8 8 bronze badges. Active Oldest Votes. It depends ultimately what you are trying to achieve, and calibrate to. Kiann Kiann 2 2 silver badges 14 14 bronze badges. Yanyi Yuan Yanyi Yuan 79 4 4 bronze badges. Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. Email Required, but never shown.
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SABR volatility model