A Comparison of Single Factor Markov-functional and Multi Factor Market Models ∗

@inproceedings{Pietersz2006ACO,
  title={A Comparison of Single Factor Markov-functional and Multi Factor Market Models ∗},
  author={Raoul Pietersz and Antoon Pelsser},
  year={2006}
}
We compare single factor Markov-functional and multi factor market models for hedging performance of Bermudan swaptions. We show that hedging performance of both models is comparable, thereby supporting the claim that Bermudan swaptions can be adequately risk-managed with single factor models. Moreover, we show that the impact of smile can be much larger than the impact of correlation. We use the constant exercise method for calculating risk sensitivities of callable products in market models… CONTINUE READING