Smooth Simultaneous Calibration of the LMM to Caplets and Coterminal Swaptions

Ametrano, Ferdinando M.; Joshi, Mark S.

doi:10.2139/ssrn.1092665

Smooth Simultaneous Calibration of the LMM to Caplets and Coterminal Swaptions

Quantitative Finance, vol. 11 (4), pp.547 - 558

20 Pages Posted: 15 Feb 2008 Last revised: 15 Jul 2014

Ferdinando M. Ametrano

Digital Gold Institute; Università Milano-Bicocca - Department of Statistics and Quantitative Methods; Politecnico di Milano - Department of Mathematics; QuantLib

Mark S. Joshi

The University of Melbourne - Centre for Actuarial Studies

Date Written: February 12, 2008

Abstract

We introduce a new calibration methodology that allows perfect fitting of the displaced diffusion LIBOR market model to caplets and co-terminal swaptions, whilst avoiding global optimizations. The approach works by regarding a forward rate as a difference of swap-rates and then bootstrapping through rates one by one.

Keywords: market model, calibration, Bermudan swaptions

JEL Classification: G13

Suggested Citation: Suggested Citation

Ametrano, Ferdinando M. and Joshi, Mark, Smooth Simultaneous Calibration of the LMM to Caplets and Coterminal Swaptions (February 12, 2008). Quantitative Finance, vol. 11 (4), pp.547 - 558. Available at SSRN: https://ssrn.com/abstract=1092665 or http://dx.doi.org/10.2139/ssrn.1092665