Linearity-Generating Processes, Unspanned Stochastic Volatility, and Interest-Rate Option Pricing [Working Paper]
Publication information:
Carr, Gabaix X, Wu L. Linearity-Generating Processes, Unspanned Stochastic Volatility, and Interest-Rate Option Pricing [Working Paper]. 2009.
Abstract
We present a tractable way to price options on any bond portfolios, including both caps and swaptions, using LG processes.