The affine inflation market models

Stefan Waldenberger

Research output: Contribution to journalArticle

Abstract

Interest rate market models, such as the LIBOR market model, have the advantage that the basic model quantities are directly observable in financial markets. Inflation market models extend this approach to inflation markets, where two types of swaps, zero-coupon and year-on-year inflation-indexed swaps, are the basic observable products. For inflation market models considered so far, closed formulas exist for only one type of swap, but not for both. The model in this paper uses affine processes in such a way that prices for both types of swaps can be calculated explicitly. Furthermore, call and put options on both types of swap rates can be calculated using one-dimensional Fourier inversion formulas. Using the derived formulas, we present an example calibration to market data.

LanguageEnglish
Pages281-301
Number of pages21
JournalApplied Mathematical Finance
Volume24
Issue number4
DOIs
StatusPublished - 4 Jul 2017

Fingerprint

Market Model
Swap
Inflation
Interest Rate Models
Inversion Formula
Financial Markets
Calibration
Swaps
Market model
Closed
Zero
Model

Keywords

  • affine processes
  • inflation options
  • Market models

ASJC Scopus subject areas

  • Finance
  • Applied Mathematics

Cite this

The affine inflation market models. / Waldenberger, Stefan.

In: Applied Mathematical Finance, Vol. 24, No. 4, 04.07.2017, p. 281-301.

Research output: Contribution to journalArticle

Waldenberger S. The affine inflation market models. Applied Mathematical Finance. 2017 Jul 4;24(4):281-301. Available from, DOI: 10.1080/1350486X.2017.1378582
Waldenberger, Stefan. / The affine inflation market models. In: Applied Mathematical Finance. 2017 ; Vol. 24, No. 4. pp. 281-301
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