Smooth simultaneous calibration of the LMM to caplets and co-terminal swaptions

Ferdinando Ametrano and Mark Joshi

Quantitative Finance, 2011, vol. 11, issue 4, 547-558

Abstract: We introduce a new calibration methodology that allows perfect fitting of the displaced diffusion LIBOR market model to caplets and co-terminal swaptions, whilst avoiding global optimizations. The approach works by regarding a forward rate as a difference of swap rates and then bootstrapping through rates one by one.

Keywords: LIBOR market models; Calibration of deterministic volatility; Computational finance; Interest rate derivatives; American style derivative securities (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/14697688.2010.535839

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