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Title:Characteristic functions in the Cheyette Interest Rate Model PDF Logo
Authors:Beyna, Ingo
Wystup, Uwe
Issue Date:2011
Series/Report no.:CPQF Working Paper Series 28
Abstract:We investigate the characteristic functions of multi-factor Cheyette Models and the application to the valuation of interest rate derivatives. The model dynamic can be classiffied as an affine-diffusion process implying an exponential structure of the characteristic function. The characteristic function is determined by a model specific system of ODEs, that can be solved explicitly for arbitrary Cheyette Models. The necessary transform inversion turns out to be numerically stable as a singularity can be removed. Thus the pricing methodology is reliable and we use it for the calibration of multi-factor Cheyette Models to caps.
Subjects:Cheyette Model
Characteristic Function
Fourier Transform
Calibration of Multi-Factor Models
Document Type:Working Paper
Appears in Collections:CPQF Working Paper Series, Frankfurt School of Finance and Management

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