Consistent Re-Calibration in Yield Curve Modeling: An Example

22 Pages Posted: 14 Jul 2015

Date Written: July 13, 2015

Abstract

Popular yield curve models include affine term structure models. These models are usually based on a fixed set of parameters which is calibrated to the actual financial market conditions. Under changing market conditions also parametrization changes. We discuss how parameters need to be updated with changing market conditions such that the re-calibration meets the premise of being free of arbitrage. We demonstrate this (consistent) re-calibration with the Hull-White extended discrete time Vasicek model at hand, but this concept applies to a wide range of related term structure models.

Keywords: yield curve modeling, term structure model, affine term structure model, interest rate model, spot rate model, Vasicek model, Hull-White extension, Heath-Jarrow-Morton framework, HJM, calibration, consistent re-calibration, CRC.

JEL Classification: E43, C51

Suggested Citation

Wuthrich, Mario V., Consistent Re-Calibration in Yield Curve Modeling: An Example (July 13, 2015). Swiss Finance Institute Research Paper No. 15-26. Available at SSRN: https://ssrn.com/abstract=2630164 or http://dx.doi.org/10.2139/ssrn.2630164

Mario V. Wuthrich (Contact Author)

RiskLab, ETH Zurich ( email )

Department of Mathematics
Ramistrasse 101
Zurich, 8092
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
158
Abstract Views
975
rank
184,771
PlumX Metrics