Forward Thinking in a World of Uncertainty: Upgraded SABR Model Provides Tools of Confidence

2019-04-03T19:24:36+00:00 April 3rd, 2019|

In the financial world, we all know the end is nigh for LIBOR. Whether the Overnight Indexed Swap (OIS) or Secured Overnight Financing Rate (SOFR) are the replacements, financial analysts will need a model with the methodology to handle the term structure rates that will ultimately replace LIBOR. ZM Financial Systems’ (ZMFS) Quantitative Research team’s SABR_LMM Term Structure Model fulfills that need.

 

Upgraded to handle the new term structures, as well as a streamlined calibration process, the ZMFS SABR_LMM Term Structure Model offers more realistic Monte Carlo rate distribution, with more accurate valuation results. Additionally, the model provides:

  • More stable SABR parameters: calibrated SABR parameters show much less variations among different market data sets that are close to each other.
  • More accurate SABR-LMM: in SABR-LMM calibration, the SSEs are much smaller for the testing market data sets. Usually the square root of SSEs are less than 20bps in a typical set up with 45 target swaptions.
  • Faster calibration: the SABR-LMM calibration alone used to take more than 20 minutes. Now the SABR calibration and the SABR-LMM calibration together take a few minutes.

 

“We streamlined our process so our model is easier to use, providing the user more control over the volatility and correlation structure,” comments Guo Chen, PhD, Director, Quantitative Research, ZMFS.  “We also radically improved our calibration process. Now, our clients can process swaps and caps within minutes, which is crucial to their work in actively managing their balance sheets.”

 

“Our clients compete with Wall Street frequently, whether buying and selling loans, securities or hedging interest rate risks,” says Butch Miner, Co-Founder, ZMFS. “This improvement is just another example of our defendable analytics, of how our clients know they can depend on us to provide them with the tools they need to transact with Wall Street quickly, efficiently and confidently.”