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Interest rate model calibration using semidefinite Programming

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Author Info
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://taylorandfrancis.metapress.com/link.asp?target=contribution&id=W09FJ9FEY3883P85
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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 10 (2003)
Issue (Month): 3 (September)
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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