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Consistent recalibration of yield curve models

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  • Philipp Harms
  • David Stefanovits
  • Josef Teichmann
  • Mario V. Wüthrich

Abstract

The analytical tractability of affine (short rate) models, such as the VasiÄ ek and the Cox–Ingersoll–Ross (CIR) models, has made them a popular choice for modeling the dynamics of interest rates. However, in order to properly account for the dynamics of real data, these models must exhibit time†dependent or even stochastic parameters. This breaks their tractability, and modeling and simulating become an arduous task. We introduce a new class of Heath–Jarrow–Morton (HJM) models that both fit the dynamics of real market data and remain tractable. We call these models consistent recalibration (CRC) models. CRC models appear as limits of concatenations of forward rate increments, each belonging to a Hull–White extended affine factor model with possibly different parameters. That is, we construct HJM models from “tangent†affine models. We develop a theory for continuous path versions of such models and discuss their numerical implementations within the VasiÄ ek and CIR frameworks.

Suggested Citation

  • Philipp Harms & David Stefanovits & Josef Teichmann & Mario V. Wüthrich, 2018. "Consistent recalibration of yield curve models," Mathematical Finance, Wiley Blackwell, vol. 28(3), pages 757-799, July.
    • Handle: RePEc:bla:mathfi:v:28:y:2018:i:3:p:757-799
    DOI: 10.1111/mafi.12159
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    Cited by:

    1. Misha Beek & Michel Mandjes & Peter Spreij & Erik Winands, 2020. "Regime switching affine processes with applications to finance," Finance and Stochastics, Springer, vol. 24(2), pages 309-333, April.
    2. Kladívko, Kamil & Rusý, Tomáš, 2023. "Maximum likelihood estimation of the Hull–White model," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 227-247.
    3. Matteo Gambara & Josef Teichmann, 2020. "Consistent Recalibration Models and Deep Calibration," Papers 2006.09455, arXiv.org, revised Jul 2021.

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