Consistent Re-Calibration in Yield Curve Modeling: An Example

Mario V. Wuthrich
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Mario V. Wuthrich: ETH Zurich and Swiss Finance Institute

No 15-26, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Popular yield curve models include affine term structure models. These models are usually based on a fixed set of parameters which is calibrated to the actual financial market conditions. Under changing market conditions also parametrization changes. We discuss how parameters need to be updated with changing market conditions such that the re-calibration meets the premise of being free of arbitrage. We demonstrate this (consistent) re-calibration with the Hull-White extended discrete time Vasicek model at hand, but this concept applies to a wide range of related term structure models.

Keywords: yield curve modeling; term structure model; affine term structure model; interest rate model; spot rate model; Vasicek model; Hull-White extension; Heath-Jarrow-Morton framework; HJM; calibration; consistent re-calibration; CRC. (search for similar items in EconPapers)
JEL-codes: C51 E43 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-07
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1526

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