Consistent Initial Curves for Interest Rate Models

The authors study the practical implications of imposing consistency in the choice of the initial curve for calibration of a Heath-Jarrow-Morton model. Consistency, simply stated, is that the initial curve should come from the class of forward rate curves that will be generated by the model at futur...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of derivatives 2002-07, Vol.9 (4), p.8-17
Main Authors: Angelini, Flavio, Herzel, Stefano
Format: Article
Language:English
Subjects:
Data analysis
Derivatives
Interest rates
Mathematical models
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The authors study the practical implications of imposing consistency in the choice of the initial curve for calibration of a Heath-Jarrow-Morton model. Consistency, simply stated, is that the initial curve should come from the class of forward rate curves that will be generated by the model at future dates. Analysis of both simulated and market data using the extended Vasicek model shows that the initial curve has a significant impact on the estimates of the parameters of the model. There is a family of curves that is consistent with the model that shows more stable estimates of market data, as well as better fitting and forecasting capabilities. [PUBLICATION ABSTRACT]
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.2002.319182