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Implications for Hedging of the Choice of Driving Process for One-Factor Markov-Functional Models
2011
Social Science Research Network
In this paper, we study the implications for hedging Bermudan swaptions of the choice of the instantaneous volatility for the driving Markov process of the one-dimensional swap Markov-functional model. We find that there is a strong evidence in favour of what we term "parametrization by time" as opposed to "parametrization by expiry". We further propose a new parametrization by time for the driving process which takes as inputs into the model the market correlations of relevant swap rates. We
doi:10.2139/ssrn.1972932
fatcat:r4c5ilwejneljkobvl43k4p7mi