Consistent recalibration of yield curve models

DOI10.1111/MAFI.12159zbMATH Open1411.91622arXiv1502.02926OpenAlexW1501485946MaRDI QIDQ4581289FDOQ4581289

Authors: Philipp Harms, David Stefanovits, Josef Teichmann, Mario V. Wüthrich 

Publication date: 16 August 2018

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

Abstract: The analytical tractability of affine (short rate) models, such as the Vasicek and the Cox-Ingersoll-Ross models, has made them a popular choice for modelling the dynamics of interest rates. However, in order to account properly for the dynamics of real data, these models need to exhibit time-dependent or even stochastic parameters. This in turn breaks their tractability, and modelling and simulating becomes an arduous task. We introduce a new class of Heath-Jarrow-Morton (HJM) models that both fit the dynamics of real market data and remain tractable. We call these models consistent recalibration (CRC) models. These CRC models appear as limits of concatenations of forward rate increments, each belonging to a Hull-White extended affine factor model with possibly different parameters. That is, we construct HJM models from "tangent" affine models. We develop a theory for a continuous path version of such models and discuss their numerical implementations within the Vasicek and Cox-Ingersoll-Ross frameworks.

Full work available at URL: https://arxiv.org/abs/1502.02926

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zbMATH Keywords

term structureyield curveinterest rateconsistent re-calibrationHull-White extension

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Numerical methods for integral equations (65R20) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Cited In (14)

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• Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model
• Extrapolating Long-Run Yield Curves: An Innovative and Consistent Approach
• Affine term structure models: A time‐change approach with perfect fit to market curves
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• Exponential moments for numerical approximations of stochastic partial differential equations
• The Hull-White model and multiobjective calibration with consistent curves: empirical evidence
• Regime switching affine processes with applications to finance
• Decreasing Yield Curves in a Model with an Unknown Constant Growth Rate
• Convergence analysis of constraint energy minimizing generalized multiscale finite element method for a linear stochastic parabolic partial differential equation driven by additive noises
• On the calibration of a Gaussian Heath-Jarrow-Morton model using consistent forward rate curves
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