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The Lognormal Mixture Variance Model

The LNVM model is a mixture of lognormal models and the model density is a linear combination of the underlying densities, for instance, log-normal densities. The resulting density of this mixture is no longer log-normal and the model can thereby better fit skew and smile observed in the market. The model is becoming increasingly widely used for interest rate/commodity hybrids.

In this review of the model, Iexamine the mathematical framework of the model in order to gain an understanding of its key features and characteristics. Continue reading

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