Markovian Projection onto a Displaced Diffusion
In this paper, we develop a systematic approach to Markovian projection onto an effective displaced diffusion, and work out a set of computationally efficient formulas valid for a large class of non-Markovian underlying processes. The generic derivation is followed by applications, including the calculation of FX options in cross-currency models and swaption pricing in LIBOR Market Models, where we are able to recover in an unambiguous way many known analytical approximations and derive several new ones.
Authors: A. Antonov and T. Misirpashaev
In this paper, we develop a systematic approach to Markovian projection onto an effective displaced diffusion, and work out a set of computationally efficient formulas valid for a large class of non-Markovian underlying processes. The generic derivation is followed by applications, including the calculation of FX options in cross-currency models and swaption pricing in LIBOR Market Models, where we are able to recover in an unambiguous way many known analytical approximations and derive several new ones.
Authors: A. Antonov and T. Misirpashaev
Authors
Dr. Alexandre Antonov
Dr. Antonov received his PhD degree from the Landau Institute for Theoretical Physics in 1997 and joined Numerix in 1998, where he currently works as a Senior Vice President of Quantitative Research. His activity is concentrated on modeling and numerical methods for interest rates, cross currency, hybrid, credit and CVA. Dr. Antonov is a published author for multiple publications in mathematical finance, including RISK magazine and a frequent speaker at financial conferences.
