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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

Milan Bicocca University - Department of Statistics and Quantitative Methods; QuantLib; Intesa Sanpaolo Bank; Banca IMI - Intesa Sanpaolo Group

Mark S. Joshi

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

Ametrano, Ferdinando M. and Joshi, Mark S., 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

Ferdinando M. Ametrano

Milan Bicocca University - Department of Statistics and Quantitative Methods ( email )

Milano, 20126
Italy

QuantLib ( email )

HOME PAGE: http://quantlib.org

Intesa Sanpaolo Bank ( email )

Italy

Banca IMI - Intesa Sanpaolo Group ( email )

Largo Mattioli 3
Milano, 20121
Italy

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

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