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Risks 2016, 4(3), 18; doi:10.3390/risks4030018

Consistent Re-Calibration of the Discrete-Time Multifactor Vasiček Model

1
Institute of Mathematics, Albert Ludwigs University of Freiburg, 79104 Freiburg, Germany
2
Department of Mathematics, ETH Zurich, 8092 Zurich, Switzerland
3
Department of Mathematics, RiskLab, ETH Zurich, 8092 Zurich, Switzerland
4
Swiss Finance Institute SFI, Walchestrasse 9, 8006 Zurich, Switzerland
We thank Hansjörg Furrer for supporting this project.
*
Author to whom correspondence should be addressed.
Academic Editor: Mogens Steffensen
Received: 21 December 2015 / Revised: 12 May 2016 / Accepted: 8 June 2016 / Published: 23 June 2016

Abstract

The discrete-time multifactor Vasiček model is a tractable Gaussian spot rate model. Typically, two- or three-factor versions allow one to capture the dependence structure between yields with different times to maturity in an appropriate way. In practice, re-calibration of the model to the prevailing market conditions leads to model parameters that change over time. Therefore, the model parameters should be understood as being time-dependent or even stochastic. Following the consistent re-calibration (CRC) approach, we construct models as concatenations of yield curve increments of Hull–White extended multifactor Vasiček models with different parameters. The CRC approach provides attractive tractable models that preserve the no-arbitrage premise. As a numerical example, we fit Swiss interest rates using CRC multifactor Vasiček models. View Full-Text
Keywords: interest rate model; re-calibration; HJM model; Vasiček model; Hull–White extension interest rate model; re-calibration; HJM model; Vasiček model; Hull–White extension
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Harms, P.; Stefanovits, D.; Teichmann, J.; Wüthrich, M.V. Consistent Re-Calibration of the Discrete-Time Multifactor Vasiček Model. Risks 2016, 4, 18.

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