Negative-Rate Swaption Pricing and SABR Model Extensions

Summary

The question asks whether the normal or shifted log-normal model is the industry standard for pricing swaptions during negative-rate conditions, with the stated purpose of supporting credit valuation adjustment work. The response does not choose between those two models or describe their relative performance. Instead, it points to a reference on modern SABR analytics as relevant reading.

The cited book is described as extending SABR methods to negative rates and allowing model calibration to swaptions and constant-maturity swaps together. This provides a possible avenue for handling rate environments where standard log-normal assumptions may be problematic, but the answer supplies no calibration details, market conventions, benchmark results, or recommendation for a particular desk. It is therefore a pointer to a modeling resource rather than a complete comparison or an industry survey; practitioners would need to assess model fit and local pricing conventions for their own instruments and CVA framework.

Key ideas

• The response does not identify a single industry-standard choice between normal and shifted log-normal swaption models.
• It points to SABR analytics as a framework discussed for environments with negative rates.
• The cited extension is described as supporting calibration to both swaptions and constant-maturity swaps.
• The answer gives no implementation guidance, comparative evidence, or desk-specific convention.

Tags

# Answer by Dimitri Vulis (score 1)


# What is the industry standard model for pricing Swaptions during this time of negative interest rates, normal model or shifted log-normal model?












I have referred to the some of the well known papers but none of them has a clear answer for my question. I know that both of these models have some disadvantages but, what is the industry standard for pricing derivatives? I need this information for pricing CVA.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/54332

You may find this text helpful: Modern SABR Analytics : Formulas and Insights for Quants, Former Physicists and Mathematicians by Alexandre Antonov, Michael Konikov, Michael Spector.

> Focusing on recent advances in option pricing under the SABR model, this book shows how to price options under this model in an arbitrage-free, theoretically consistent manner. It extends SABR to a negative rates environment, and shows how to generalize it to a similar model with additional degrees of freedom, allowing simultaneous model calibration to swaptions and CMSs.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.