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Calibration of Interest Rate Models - Transition Market Case

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Martin Vojtek (CERGE-EI)

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Abstract

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 EconWPA in its series Finance with number 0410015.

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Length: 50 pages
Date of creation: 26 Oct 2004
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Handle: RePEc:wpa:wuwpfi:0410015

Note: Type of Document - pdf; pages: 50
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Web page: http://129.3.20.41

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Keywords: Interest rate Interest rate models Calibration Transition countries

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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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  1. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  3. 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)
  4. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December. [Downloadable!] (restricted)
  5. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  6. Nowman, K B, 1997. " Gaussian Estimation of Single-Factor Continuous Time Models of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 52(4), pages 1695-1706, September. [Downloadable!] (restricted)
  7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  9. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 385-426. [Downloadable!] (restricted)
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  10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. [Downloadable!] (restricted)
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