Interest rate model calibration using semidefinite Programming
AbstractIt 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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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 10 (2003)
Issue (Month): 3 ()
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- S. Galluccio & J.-M. Ly & Z. Huang & O. Scaillet, 2007.
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