Paper: arXiv 2509.25975
Authors: Reo Adachi, Masaaki Fukasawa, Naoki Iida, Mitsumasa Ikeda, Yo Nakatsu, Ryota Tsurumi, Tomohisa Yamakami
Abstract
This paper advances interest rate modeling in the post-LIBOR era by introducing rough stochastic volatility into the Forward Market Model (FMM). We establish a rigorous asymptotic expansion of swaption implied volatility, connecting the FMM to a rough Bergomi-type framework for forward swap rates. This contribution bridges the gap between Heath-Jarrow-Morton (HJM)-consistent forward term rate models and forward swap rate models with stochastic volatility, offering a parsimonious yet precise framework for modeling swaption volatility surfaces. Furthermore, we justify and generalize the widely used “freezing” approximation within a rigorous mathematical framework. The proposed approach enhances the representation of persistent skew and term structure, addressing key challenges in modern fixed income markets.
Complexity vs Empirical Score
- Math Complexity: 8.5/10
- Empirical Rigor: 5.0/10
- Quadrant: Holy Grail — high math complexity, high empirical rigor
Why this score: The paper provides a strong theoretical contribution by integrating rough volatility into the post-LIBOR Forward Market Model and rigorously formalizing the freezing approximation using advanced stochastic calculus and asymptotic expansions. However, empirical rigor is limited primarily to illustrative calibration experiments without extensive out-of-sample backtesting, and code is not explicitly provided.
Research Flowchart
flowchart TD
A[Research Goal: Advance Interest Rate Modeling in Post-LIBOR Era] --> B[Input: Rough Stochastic Volatility & Forward Market Model]
B --> C[Method: Apply & Mathematically Justify Freezing Approximation]
C --> D[Computation: Derive Asymptotic Expansion for Swaption Implied Volatility]
D --> E[Outcome: Connect FMM to Rough Bergomi-type Framework]
E --> F[Outcome: Precise Modeling of Persistent Skew & Term Structure]
Cited References (12)
- Hybrid scheme for Brownian semistationary processes (2017)
- The microstructural foundations of leverage effect and rough volatility (2018)
- Parametrising correlation matrices (2020)
- Volatility has to be rough (2021)
- A rough SABR formula (2022)
- On asymptotically arbitrage-free approximations of the implied volatility (2022)
- Hedging under rough volatility (2023)
- On swap rate dynamics: To freeze or not to freeze? (2017)
and 4 more
- On the martingale property in the rough Bergomi model (2019)
- Looking forward to backward-looking rates: A modeling framework for term rates replacing LIBOR (2019) — link
- The SABR / LIBOR Market Model: Pricing, Calibration and Hedging for Complex Interest-Rate Derivatives (2009)
- Parameterizing correlations: A geometric interpretation (2007)
0 of 12 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.