Risk.net | September 10, 2015 | By Nazneen Sherif

Cutting Edge Introduction: Sticky SABR

The September issue of Risk Magazine features a compelling and well researched Cutting Edge Introduction article written by Nazneen Sherif.  The article introduces this month's Technical Research authored by Numerix quantitative experts, Dr. Alexandre Antonov, Dr. Michael Konikov and Dr. Michael Spector. This quantitative research paper, “The Free Boundary SABR: Natural Extension to Negative Rates,” outlines how the widely used SABR model can be extended to incorporate a “free boundary” SABR process, more naturally permitting negative rates versus a shifted SABR process, and eliminating the arbitrary lower bound on rates.

Sherif explains how "historically rates tend to be sticky around zero, however existing models do not capture this. Numerix has therefore introduced two boundary conditions to address the omission: when rates are positive, an absorbing boundary condition at zero to ensure the positivity of rates; and a free boundary condition to allow rates to go negative when they dip below zero. The latter allows the rate to go to a negative value of any size – something impossible in shifted models. "1

1Sherif, Nazneen. "Cutting Edge introduction: Sticky SABR." Risk. 10 Sept. 2015. <http://www.risk.net/risk-magazine/technical-paper/2424849/cutting-edge-introduction-sticky-sabr>

 

 

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