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An alternative approach to the calibration of the Vasicek and CIR interest rate models via generating functions

Journal Article


Abstract


  • We propose a new method to calibrate the Vasicek and Cox--Ingersoll--Ross interest rate models from bond prices. We define an appropriate generating function and derive recursive relations between the derivatives of the generating function and the bond prices. The parameters of the Vasicek and CIR models are then obtained by solving a system of linearly independent equations arising from the recursive relations. We include numerical results that show the method’s accuracy when bond prices generated from the exact formulas are used.

Publication Date


  • 2014

Citation


  • Rodrigo, M. R. & Mamon, R. S. (2014). An alternative approach to the calibration of the Vasicek and CIR interest rate models via generating functions. Quantitative Finance, 14 (11), 1961-1970.

Scopus Eid


  • 2-s2.0-84907874922

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/2284

Number Of Pages


  • 9

Start Page


  • 1961

End Page


  • 1970

Volume


  • 14

Issue


  • 11

Place Of Publication


  • http://www.tandfonline.com/doi/abs/10.1080/14697688.2013.765062#.VE2VnxaVaqk

Abstract


  • We propose a new method to calibrate the Vasicek and Cox--Ingersoll--Ross interest rate models from bond prices. We define an appropriate generating function and derive recursive relations between the derivatives of the generating function and the bond prices. The parameters of the Vasicek and CIR models are then obtained by solving a system of linearly independent equations arising from the recursive relations. We include numerical results that show the method’s accuracy when bond prices generated from the exact formulas are used.

Publication Date


  • 2014

Citation


  • Rodrigo, M. R. & Mamon, R. S. (2014). An alternative approach to the calibration of the Vasicek and CIR interest rate models via generating functions. Quantitative Finance, 14 (11), 1961-1970.

Scopus Eid


  • 2-s2.0-84907874922

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/2284

Number Of Pages


  • 9

Start Page


  • 1961

End Page


  • 1970

Volume


  • 14

Issue


  • 11

Place Of Publication


  • http://www.tandfonline.com/doi/abs/10.1080/14697688.2013.765062#.VE2VnxaVaqk