A methodology to calibrate multifactor interest rate model for transition countries is proposed. The usual methodology of calibration with implied volatility cannot be used as there are no markets for regularly traded derivatives. The existence of such a markets is essential for this calibration. The paradigm used is the Brace-Gatarek-Musiela model of interest rates (Brace, Gatarek and Musiela (1997)), which models the evolution of LIBOR (London InterBank Offered Rate) market interest rates, together with the Orthogonal GARCH model proposed by Alexander (2002), and further generalized by van der Weide (2002). The estimated model is used for the analysis of interest rate markets with shorter-end maturities in the 4 Visegrad countries (Slovak Republic, Czech Republic, Poland and Hungary).
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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number
wp237.
Find related papers by JEL classification: C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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