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Interest rate model calibration using semidefinite Programming

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  • A. D'Aspremont
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    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/1350486032000141002
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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 10 (2003)
    Issue (Month): 3 ()
    Pages: 183-213

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    Handle: RePEc:taf:apmtfi:v:10:y:2003:i:3:p:183-213

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    Related research

    Keywords: semidefinite programming; Libor market model; calibration; basket options;

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    Cited by:
    1. Jesús P. Colino & Francisco J. Nogales & Winfried Stute, 2008. "LIBOR additive model calibration to swaptions markets," Statistics and Econometrics Working Papers ws085619, Universidad Carlos III, Departamento de Estadística y Econometría.

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