Regression modelStochastic Volatility
SABR Model
The SABR (Stochastic Alpha-Beta-Rho) model is a stochastic volatility framework introduced by Hagan et al. in 2002 for valuing interest rate derivatives. It captures the smile effect in implied volatility through correlated Brownian motions and has become industry standard for swaption and caplet pricing.
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Sources
- Hagan, P. S., Kumar, D., Lesniewski, A. S., & Woodward, D. E. (2002). Managing smile risk. Wilmott Magazine, 1, 84-108. DOI: 10.48550/arXiv.1305.5568 ↗
- Rebonato, R. (2004). Volatility and Correlation: The Perfect Hedger and the Fox. John Wiley & Sons. link ↗