Estimating Mean Reversions in Interest Rate Models

Abstract

Estimating mean reversion speeds is an important step for calibrating interest rate models for the purposes of derivatives pricing. Relatively little has been written about it, especially for multi-factor models. We present a simple yet general framework for estimating mean reversion speeds of model factors for a broad sub-class of multi-factor HJM models. Our procedure is independent of market prices of risk and has only negligible dependence on volatility specification.

Keywords: HJM, Cheyette, multi-factor, mean reversion, volatility

JEL Classification: C51, G13, G15