Consistent Re-Calibration of the Discrete-Time Multifactor Vasi?ek Model

Philipp Harms, David Stefanovits, Josef Teichmann and Mario V. Wüthrich
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Philipp Harms: Institute of Mathematics, Albert Ludwigs University of Freiburg, 79104 Freiburg, Germany
David Stefanovits: Department of Mathematics, ETH Zurich, 8092 Zurich, Switzerland
Josef Teichmann: Department of Mathematics, ETH Zurich, 8092 Zurich, Switzerland
Mario V. Wüthrich: Department of Mathematics, RiskLab, ETH Zurich, 8092 Zurich, Switzerland

Risks, 2016, vol. 4, issue 3, 1-31

Abstract: The discrete-time multifactor Vasi?ek model is a tractable Gaussian spot rate model. Typically, two- or three-factor versions allow one to capture the dependence structure between yields with different times to maturity in an appropriate way. In practice, re-calibration of the model to the prevailing market conditions leads to model parameters that change over time. Therefore, the model parameters should be understood as being time-dependent or even stochastic. Following the consistent re-calibration (CRC) approach, we construct models as concatenations of yield curve increments of Hull–White extended multifactor Vasi?ek models with different parameters. The CRC approach provides attractive tractable models that preserve the no-arbitrage premise. As a numerical example, we fit Swiss interest rates using CRC multifactor Vasi?ek models.

Keywords: interest rate model; re-calibration; HJM model; Vasi?ek model; Hull–White extension (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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