Pricing Inflation Derivatives Within Interest Rate Stochastic Volatility
Date Issued
2015
Date
2015
Author(s)
Pan, Bo-Cheng
Abstract
We consider a Heston type inflation model in combination with a Fong-Vasicek model for nominal and real interests and their variance, in which correlations can be non-zero. Due to the presence of Heston dynamics our derived inflation model is able to capture the implied volatility smile/skew, which is present in the inflation market data. Fong-Vasicek model can capture the stochastic interest rate volatility which is deterministic in the previous papers. We derive the dynamic under T Forward measure, and use the Monte Carlo Simulation to price the inflation options.
Subjects
Fong-Vasicek model
Heston model
Stochastic volatility
Foreign Currency Analysis
Inflation options
Type
thesis
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ntu-104-R01723080-1.pdf
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