Rafael De Santiago, Graduate Student, UC Irvine
"Interest Rate Markets with Stochastic Volatility"
Abstract: We analyze stochastic volatility effects in the context of the bond market. The short rate model is of Vasicek type and the focus of our analysis is the effect of multiple scale variations in the volatility of this model. Using a singular perturbation approach we can identify a parsimonious representation of multiscale stochastic volatility effects. The results are illustrated with numerical simulations. We also present a framework for model calibration and look at applications to bond option pricing.