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In mathematical finance, the SABR model is a stochastic volatility model, which attempts to capture the volatility smile in derivatives markets. The name stands for " stochastic alpha , beta , rho ", referring to the parameters of the model.
Starting from a constant volatility approach, assume that the derivative's underlying asset price follows a standard model for geometric Brownian motion: = + where is the constant drift (i.e. expected return) of the security price , is the constant volatility, and is a standard Wiener process with zero mean and unit rate of variance.
Modelling the volatility smile is an active area of research in quantitative finance, and better pricing models such as the stochastic volatility model partially address this issue. A related concept is that of term structure of volatility , which describes how (implied) volatility differs for related options with different maturities.
When the volatility and drift of the instantaneous forward rate are assumed to be deterministic, this is known as the Gaussian Heath–Jarrow–Morton (HJM) model of forward rates. [ 1 ] : 394 For direct modeling of simple forward rates the Brace–Gatarek–Musiela model represents an example.
SABR is the Society for American Baseball Research. SABR may also refer to: Sabr, an Islamic term that roughly translates to patience; Sabre Corporation (NASDAQ: SABR), an American travel technology company; SABR volatility model, in mathematical finance
Capital asset pricing model; Carhart four-factor model; Carr–Madan formula; Chan–Karolyi–Longstaff–Sanders process; Chen model; Cheyette model; Constant elasticity of variance model; Consumption-based capital asset pricing model; Cox–Ingersoll–Ross model
In finance, the Heston model, named after Steven L. Heston, is a mathematical model that describes the evolution of the volatility of an underlying asset. [1] It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process .
C. Calendar spread; Callable bull/bear contract; Capital guarantee; Cash flow hedge; Cashflow matching; CDO-Squared; Chain of Blame; Chan–Karolyi–Longstaff–Sanders process