Characteristic functions in the Cheyette Interest Rate Model

Ingo Beyna and Uwe Wystup

No 28, CPQF Working Paper Series from Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF)

Abstract: We investigate the characteristic functions of multi-factor Cheyette Models and the application to the valuation of interest rate derivatives. The model dynamic can be classiffied as an affine-diffusion process implying an exponential structure of the characteristic function. The characteristic function is determined by a model specific system of ODEs, that can be solved explicitly for arbitrary Cheyette Models. The necessary transform inversion turns out to be numerically stable as a singularity can be removed. Thus the pricing methodology is reliable and we use it for the calibration of multi-factor Cheyette Models to caps.

Keywords: Cheyette Model; Characteristic Function; Fourier Transform; Calibration of Multi-Factor Models (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cpqfwp:28

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