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Modelling the South African Inter-Bank Interest Rate Market using a Log-Normal Rational Pricing Kernel Model
This dissertation examines the performance of two log-normal rational pricing kernel models and their calibration to the South African Inter-bank interest rate market. We investigate using Monte-Carlo simulation to price caps, floors and swaptions. Model-performance for both models was tested on sin...
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| Format: | Thesis |
| Language: | English |
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African Institute of Financial Markets and Risk Management
2020
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| Summary: | This dissertation examines the performance of two log-normal rational pricing kernel models and their calibration to the South African Inter-bank interest rate market. We investigate using Monte-Carlo simulation to price caps, floors and swaptions. Model-performance for both models was tested on single-strikes and entire volatility surfaces. Our results show that a one-factor model cannot reproduce the volatility smile present in the caps/floor market but can reproduce the at-the money swaption volatility surface. The two-factor model produces a better calibration to the volatility smile and captures most of the characteristics of the volatility surface. |
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