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A stochastic volatility Libor model and its robust calibration

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Author Info
Denis Belomestny
Stanley Matthew
John Schoenmakers
Abstract

In this paper we propose a Libor model with a high-dimensional specially structured system of driving CIR volatility processes. A stable calibration procedure which takes into account a given local correlation structure is presented. The calibration algorithm is FFT based, so fast and easy to implement.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2007-067.pdf
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Publisher Info
Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2007-067.

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Length: 26 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2007-067

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Related research
Keywords: Libor modelling stochastic volatility CIR processes calibration

Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
I19 - Health, Education, and Welfare - - Health - - - Other
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Denis Belomestny & John Schoenmakers, 2006. "A jump-diffusion Libor model and its robust calibration," SFB 649 Discussion Papers SFB649DP2006-037, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  2. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  3. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144. [Downloadable!] (restricted)
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  4. Paul Glasserman & S. G. Kou, 2003. "The Term Structure of Simple Forward Rates with Jump Risk," Mathematical Finance, Blackwell Publishing, vol. 13(3), pages 383-410. [Downloadable!] (restricted)
  5. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(2), pages 327-43. [Downloadable!] (restricted)
  6. Christian Kahl & Peter Jäckel, 2006. "Fast strong approximation Monte Carlo schemes for stochastic volatility models," Quantitative Finance, Taylor and Francis Journals, vol. 6(6), pages 513-536, December. [Downloadable!] (restricted)
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