Consistent Re-Calibration of the Discrete-Time Multifactor Vasi\v{c}ek Model

Philipp Harms, David Stefanovits, Josef Teichmann and Mario V. W\"uthrich

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Abstract: The discrete-time multifactor Vasi\v{c}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\v{c}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\v{c}ek models.

Date: 2015-12, Revised 2016-09
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Published in Risks 4, 3 (2016), pp. 1-31

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