Interest Rate Model Calibration Using Semidefinite Programming
Alexandre d'Aspremont
Abstract
We show that, for the purpose of pricing Swaptions, the Swap rate and the corresponding Forward rates can be considered lognormal under a single martingale measure. Swaptions can then be priced as options on a basket of lognormal assets and an approximation formula is derived for such options. This formula is centered around a Black-Scholes price with an appropriate volatility, plus a correction term that can be interpreted as the expected tracking error. The calibration problem can then be solved very efficiently using semidefinite programming.
Create a lesson
Related papers
SabreAgent: Language Models at Design Time for Lost-Sales Inventory Control
Yang Liu, Yulin Huang, Xue Yu et al.
Topology optimization with buckling constraints: Adaptive eigenvalue aggregation and modality identification
Badvelu Pranay Prabha, Prabhat Kumar
An Insurance Broker for Every Small Business: The Economics of Exceptional Care at Scale
Pierre-Alexandre Kamienny, Parthasarathi Ainampudi, Corentin Hugot et al.
From Corridor Selection to Earthwork: A Multi-Stage Framework for Automated Road Design via Steiner Trees and Convex Optimization
Paavai Manimaran Vanjeenathammal, John R. J. Thompson, Warren Hare et al.
From powder to part: influence of virgin and recovered Inconel 625 powders on the DED-LP processability, microstructure and mechanical properties
Romain Deloffre, Lorène Héraud, Julie Lartigau
Piezoelectric Energy Harvesting from a Pitch-Plunge Aerofoil in Compressible Flow, the Euler Full-Order Model, Strip Theory and the Reduced Models Compared
Nikolaos D. Tantaroudas, Ilias Karachalios, Andrew J. McCracken