Consistent recalibration of yield curve models

Philipp Harms, David Stefanovits, Josef Teichmann and Mario V. Wüthrich

Mathematical Finance, 2018, vol. 28, issue 3, 757-799

Abstract: The analytical tractability of affine (short rate) models, such as the VasiÄ ek and the Cox–Ingersoll–Ross (CIR) models, has made them a popular choice for modeling the dynamics of interest rates. However, in order to properly account for the dynamics of real data, these models must exhibit time†dependent or even stochastic parameters. This breaks their tractability, and modeling and simulating become 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. 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 continuous path versions of such models and discuss their numerical implementations within the VasiÄ ek and CIR frameworks.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/mafi.12159

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:28:y:2018:i:3:p:757-799

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0960-1627

Access Statistics for this article

Mathematical Finance is currently edited by Jerome Detemple

More articles in Mathematical Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().