Consistent Re-Calibration in Yield Curve Modeling: An Example
22 Pages Posted: 14 Jul 2015
Date Written: July 13, 2015
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: Suggested Citation