IMPLIED KERNEL MODELS

Peter Weigel ()
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Peter Weigel: Quantitative Research, Global Derivatives, Capital Markets, Dresdner Kleinwort Wasserstein, Theodor-Heuss-Allee 44, Frankfurt, D-60486, Germany;

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 05, 575-601

Abstract: We develop a class of models within the pricing kernel framework, i.e., we model the pricing kernel directly, and not a particular interest rate or a set of rates. The construction of the kernel is explicitly linked to the calibrating set of instruments. Thus, once the kernel is constructed it will price correctly the chosen set of instruments, and have a low-dimensional Markov structure. We test our model on yield, at-the-money cap, caplet implied volatility surface, and swaption data. The quality of fit is very good.

Keywords: Term structure of interest rates; derivative pricing; pricing kernel; radial and ridge functions (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:08:y:2005:i:05:n:s0219024905003153

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DOI: 10.1142/S0219024905003153

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