Free Boundaries SABR

Approaches for model assessment and validation

Confronted with the current low-rates environment, many fixed income derivatives market professionals (investment banks, market makers, hedge funds, etc.) are reviewing possible solutions to adapt their derivatives pricers. It is particularly the case of those models assuming stochastic volatilities under SABR processes. A recent article published by the quant teams of Numerix  proposes innovative solutions to go beyond the usual trivial approaches or “rates shifting” solutions. In this white paper we summarize our understanding of the article and propose an initial review of the main points of attention one should consider in the context of model assessment and its validation.Sebastien de Valeriola, Wim Konings and François Ducuroir