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A multiobjective approach using consistent rate curves to the calibration of a Gaussian Heath-Jarrow-Morton model

Author

Listed:
  • Antonio Falcó

    (Universidad CEU Cardenal Herrera)

  • Juan Nave

    (Universidad de Castilla-La Mancha)

  • Lluís Navarro

    (Universidad CEU Cardenal Herrera)

Abstract

In this paper we propose an alternate calibration algorithm, by using a consistent family of yield curves, that fits a Gaussian Heath-Jarrow-Morton model jointly to the implied volatilities of caps and zero-coupon bond prices. The algorithm is capable for finding several Pareto optimal points as is expected for a general nonlinear multicriteria optimization problem. The calibration approach is evaluated in terms of in-sample data fitting as well as stability of parameter estimates. Furthermore, the efficiency is tested against a non-consistent traditional method by using simulated and US market data.

Suggested Citation

  • Antonio Falcó & Juan Nave & Lluís Navarro, 2008. "A multiobjective approach using consistent rate curves to the calibration of a Gaussian Heath-Jarrow-Morton model," Working Papers. Serie AD 2008-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2008-09
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2008-09.pdf
    File Function: Fisrt version / Primera version, 2008
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    References listed on IDEAS

    as
    1. Flavio Angelini & Stefano Herzel, 2005. "Consistent calibration of HJM models to cap implied volatilities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(11), pages 1093-1120, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    HJM models; consistent forward rate curves; multiobjective calibration;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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