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Consistent Recalibration of Yield Curve Models

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  • Philipp Harms
  • David Stefanovits
  • Josef Teichmann
  • Mario Wuthrich

Abstract

The analytical tractability of affine (short rate) models, such as the Vasicek and the Cox-Ingersoll-Ross models, has made them a popular choice for modelling the dynamics of interest rates. However, in order to account properly for the dynamics of real data, these models need to exhibit time-dependent or even stochastic parameters. This in turn breaks their tractability, and modelling and simulating becomes an arduous task. We introduce a new class of Heath-Jarrow-Morton (HJM) models that both fit the dynamics of real market data and remain tractable. We call these models consistent recalibration (CRC) models. These CRC models appear as limits of concatenations of forward rate increments, each belonging to a Hull-White extended affine factor model with possibly different parameters. That is, we construct HJM models from "tangent" affine models. We develop a theory for a continuous path version of such models and discuss their numerical implementations within the Vasicek and Cox-Ingersoll-Ross frameworks.

Suggested Citation

  • Philipp Harms & David Stefanovits & Josef Teichmann & Mario Wuthrich, 2015. "Consistent Recalibration of Yield Curve Models," Papers 1502.02926, arXiv.org, revised Sep 2016.
    • Handle: RePEc:arx:papers:1502.02926
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    References listed on IDEAS

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    1. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    3. Josef Teichmann & Mario V. Wuthrich, 2012. "Consistent Long-Term Yield Curve Prediction," Papers 1203.2017, arXiv.org.
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    Cited by:

    1. Philipp Harms & David Stefanovits & Josef Teichmann & Mario V. Wuthrich, 2015. "Consistent Re-Calibration of the Discrete-Time Multifactor Vasi\v{c}ek Model," Papers 1512.06454, arXiv.org, revised Sep 2016.

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