Do Stochastic Interest Rates affect the Quality of the Equity Implied Volatility Fit in the ESG?
Document ID: 2006-103 (previously 2006/002)
Published on: 1st January 2006
Author: Steven Morrison, Rutang Thanawalla
Textbook examples of stochastic modelling typically focus on the stochastics of one asset class while ignoring the randomness in other asset classes. B & H’s ESG involves stochastic asset modelling across asset classes. This note investigates whether stochastic interest rates affect the quality of the equity implied volatility fit. In the experiments the analysis is restricted to the local volatility model for equity assets and the Libor Market model for interest rate term structure.
