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Consistent Re-Calibration in Yield Curve Modeling: An Example

Author

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  • Mario V. Wuthrich

    (ETH Zurich and Swiss Finance Institute)

Abstract

Popular yield curve models include affine term structure models. These models are usually based on a fixed set of parameters which is calibrated to the actual financial market conditions. Under changing market conditions also parametrization changes. We discuss how parameters need to be updated with changing market conditions such that the re-calibration meets the premise of being free of arbitrage. We demonstrate this (consistent) re-calibration with the Hull-White extended discrete time Vasicek model at hand, but this concept applies to a wide range of related term structure models.

Suggested Citation

  • Mario V. Wuthrich, 2015. "Consistent Re-Calibration in Yield Curve Modeling: An Example," Swiss Finance Institute Research Paper Series 15-26, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1526
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    File URL: http://ssrn.com/abstract=2630164
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    More about this item

    Keywords

    yield curve modeling; term structure model; affine term structure model; interest rate model; spot rate model; Vasicek model; Hull-White extension; Heath-Jarrow-Morton framework; HJM; calibration; consistent re-calibration; CRC.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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