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Characteristic functions in the Cheyette Interest Rate Model

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  • Beyna, Ingo
  • Wystup, Uwe
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    Abstract

    We investigate the characteristic functions of multi-factor Cheyette Models and the application to the valuation of interest rate derivatives. The model dynamic can be classiffied as an affine-diffusion process implying an exponential structure of the characteristic function. The characteristic function is determined by a model specific system of ODEs, that can be solved explicitly for arbitrary Cheyette Models. The necessary transform inversion turns out to be numerically stable as a singularity can be removed. Thus the pricing methodology is reliable and we use it for the calibration of multi-factor Cheyette Models to caps. --

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    Bibliographic Info

    Paper provided by Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF) in its series CPQF Working Paper Series with number 28.

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    Date of creation: 2011
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    Handle: RePEc:zbw:cpqfwp:28

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    Related research

    Keywords: Cheyette Model; Characteristic Function; Fourier Transform; Calibration of Multi-Factor Models;

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    1. Ansgar Belke & Thorsten Polleit, 2005. "(How) Do Stock Market Returns React to Monetary Policy? - An ARDL Cointegration Analysis for Germany," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 253/2005, Department of Economics, University of Hohenheim, Germany.
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    6. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    7. Bannier, Christina E. & Feess, Eberhard, 2010. "When high-powered incentive contracts reduce performance: choking under pressure as a screening device," Frankfurt School - Working Paper Series 135, Frankfurt School of Finance and Management.
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    9. Wollersheim, Jutta & Barthel, Erich, 2008. "Kulturunterschiede bei Mergers & Acquisitions: Entwicklung eines Konzeptes zur Durchführung einer Cultural Due Diligence," Frankfurt School - Working Paper Series 94, Frankfurt School of Finance and Management.
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