Interest rate model calibration using semidefinite Programming

A. D'Aspremont

Applied Mathematical Finance, 2003, vol. 10, issue 3, 183-213

Abstract: It is shown that, for the purpose of pricing swaptions, the swap rate and the corresponding forward rates can be considered lognormal under a single martingale measure. Swaptions can then be priced as options on a basket of lognormal assets and an approximation formula is derived for such options. This formula is centred around a Black-Scholes price with an appropriate volatility, plus a correction term that can be interpreted as the expected tracking error. The calibration problem can then be solved very efficiently using semidefinite programming.

Keywords: semidefinite programming; Libor market model; calibration; basket options (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1080/1350486032000141002

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