Interest rate model calibration using semidefinite Programming

DOI10.1080/1350486032000141002MaRDI QIDQ4811558zbMATH OpenOpenAlexFDO

Authors Alexandre d'Aspremont

Publication date 6 September 2004

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cs/0302034

zbMATH Keywords

semidefinite programmingcalibrationbasket optionsLibor market model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Semidefinite programming (90C22) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We show that, for the purpose of pricing Swaptions, the Swap rate and the corresponding Forward rates can be considered lognormal under a single martingale measure. Swaptions can then be priced as options on a basket of lognormal assets and an approximation formula is derived for such options. This formula is centered around a Black-Scholes price with an appropriate volatility, plus a correction term that can be interpreted as the expected tracking error. The calibration problem can then be solved very efficiently using semidefinite programming.

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Cited in

(7)

• Multidimensional calibration of crude oil and refined products via semidefinite programming techniques
• Measurement of interest rates using a convex optimization model
• THEORY AND CALIBRATION OF SWAP MARKET MODELS
• Calibration of stochastic models for interest rate derivatives
• Implied volatility of basket options at extreme strikes
• On swap rate dynamics: to freeze or not to freeze?
• Static arbitrage bounds on basket option prices

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