Pricing of bond options. Unspanned stochastic volatility and random field models. (Q946627)

The author studies unspanned stochastic volatility (USV) as well as Random Fields (RF) to model the dynamics of entire yield curves. The USV models postulate a correlation between the bond price dynamics and the subordinated stochastic volatility process, while the RF models allow for a deterministic correlation structure between bond prices of different terms. The author shows how fast and accurate pricing can be achieved by either running a Fractional Fourier Transform or by an Integrated Edgeworth Expansion approach. The author also include the relevant Matlab code.