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Title:On the calibration of the Cheyette interest rate model PDF Logo
Authors:Beyna, Ingo
Wystup, Uwe
Issue Date:2010
Series/Report no.:CPQF Working Paper Series 25
Abstract:We investigate the robustness of existing methods to calibrate the Cheyette interest rate model to at-the-money swaption, caps and floors. Existing algorithms may fail, because they suffer from numerical instability of derivatives. Therefore, we apply derivative-free techniques and find that they stabilize the calibration. Furthermore, we identify auspicious volatility parametrizations determining the Cheyette model. In combination with the established calibration techniques the results imply an accurate market reproduction and stay robust against changes in the initial values. In contrast to existing approaches that use approximations, we apply exact semi-close-form pricing formulas.
Subjects:Cheyette Model
Optimization without derivatives
Genetic Optimization
Document Type:Working Paper
Appears in Collections:CPQF Working Paper Series, Frankfurt School of Finance and Management

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