Interest Rates Calibration with a CIR Model
'Interest Rates Calibration with a CIR Model', with R.M. Mininni and M. Bufalo- Journal of Risk Finance, Emerald Publishing, 14 Sept. 2019, DOI: 10.1108/JRF-05-2019-0080
Posted: 20 Oct 2019
Date Written: September 14, 2019
The purpose of this paper is to model interest rates from observed financial market data through a new approach to the Cox–Ingersoll–Ross (CIR) model. This model is popular among financial institutions mainly because it is a rather simple (uni-factorial) and better model than the former Vasicek framework. However, there are a number of issues in describing interest rate dynamics within the CIR framework on which focus should be placed. Therefore, a new methodology has been proposed that allows forecasting future expected interest rates from observed financial market data by preserving the structure of the original CIR model, even with negative interest rates. The performance of the new approach, tested on monthly-recorded interest rates data, provides a good fit to current data for different term structures.
Keywords: Calibration, Forecasting and simulation, Interest rates, CIR model
JEL Classification: G12, E43, E47
Suggested Citation: Suggested Citation