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Implied Kernel Models

Author

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  • PETER WEIGEL

    (Quantitative Research, Global Derivatives, Capital Markets, Dresdner Kleinwort Wasserstein, Theodor-Heuss-Allee 44, Frankfurt, D-60486, Germany;
    Financial Options Research Centre, University of Warwick, Coventry CV4 7AL, UK)

Abstract

We develop a class of models within the pricing kernel framework, i.e., we model the pricing kernel directly, and not a particular interest rate or a set of rates. The construction of the kernel is explicitly linked to the calibrating set of instruments. Thus, once the kernel is constructed it will price correctly the chosen set of instruments, and have a low-dimensional Markov structure. We test our model on yield, at-the-money cap, caplet implied volatility surface, and swaption data. The quality of fit is very good.

Suggested Citation

  • Peter Weigel, 2005. "Implied Kernel Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(05), pages 575-601.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:05:n:s0219024905003153
    DOI: 10.1142/S0219024905003153
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    References listed on IDEAS

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    1. Driessen, J.J.A.G. & Klaassen, P. & Melenberg, B., 2000. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Other publications TiSEM f96eb284-4de9-48c3-8371-8, Tilburg University, School of Economics and Management.
    2. Driessen, Joost & Klaassen, Pieter & Melenberg, Bertrand, 2003. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(3), pages 635-672, September.
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