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LIBOR additive model calibration to swaptions markets

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Author Info
Jesús P. Colino ()
Francisco J. Nogales ()
Winfried Stute ()
Abstract

In the current paper, we introduce a new calibration methodology for the LIBOR market model driven by LIBOR additive processes based in an inverse problem. This problem can be splitted in the calibration of the continuous and discontinuous part, linking each part of the problem with at-the-money and in/out -of -the-money swaption volatilies. The continuous part is based on a semidefinite programming (convex) problem, with constraints in terms of variability or robustness, and the calibration of the Lévy measure is proposed to calibrate inverting the Fourier Transform.

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Paper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws085619.

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Date of creation: Nov 2008
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Handle: RePEc:cte:wsrepe:ws085619

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Related research
Keywords: Lévy Market model; Calibration; Semidefinite programming;

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  1. A. D'Aspremont, 2003. "Interest rate model calibration using semidefinite Programming," Applied Mathematical Finance, Taylor and Francis Journals, vol. 10(3), pages 183-213, September. [Downloadable!] (restricted)
  2. Peter Carr & Hélyette Geman & Dilip Madan & Marc Yor, 2005. "Pricing options on realized variance," Finance and Stochastics, Springer, vol. 9(4), pages 453-475, October. [Downloadable!] (restricted)
  3. Brigo, Damiano & Mercurio, Fabio & Morini, Massimo, 2005. "The LIBOR model dynamics: Approximations, calibration and diagnostics," European Journal of Operational Research, Elsevier, vol. 163(1), pages 30-51, May. [Downloadable!] (restricted)
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