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2
votes
1answer
85 views

How to get around flat likelihood function when calibrating GBM parameters

(Hope this is the correct place for this question - I posted it first on stackoverflow:) I want to calibrate jointly the drift mu and volatility sigma of a geometric brownian motion, ...
3
votes
0answers
326 views

How does one estimate theta in the Ho-Lee model from a yield curve?

I have a yield curve constructed using linear interpolation with data points every 3-months for US treasuries. I would like to use that calibrate a Ho-Lee model, but I can't wrap my head around how ...
2
votes
0answers
29 views

How to calibrate volatility surface for Interest Rate Cap&Floor pricing

I'm using Black model to do interest rate Cap & Floor pricing. The volatility is determined by using the bootstrapping methodology. However, afterwards, how should I do the calibration, or ...
2
votes
0answers
53 views

Calibration of Heston version of CIR

I'd like to calibrate a variant of Heston model for interest rates which is describe by this couple of SDE \begin{aligned}dr_t&=a(b-r_t)+\sqrt{r_t}\sigma_t dW_t^1 \\ ...
2
votes
0answers
57 views

Calibration of Hull White One factor model in F.C.Park paper

I want to ask a question with reference to a paper from below link http://www.cmpr.co.kr/asset/research_material/implementing_interest_rate_models.pdf Minimization specified in Page 14: Mean ...
2
votes
0answers
98 views

Do some option pricing models allow for misspecification and what does it mean?

This is to some extent a theoretical question and maybe we can work together to produce some input and output. Diverse option pricing models are reported to be misspecified in various studies. One ...
2
votes
0answers
160 views

Dual curves and short rate calibration

When I calibrate a short rate model to market swaption vols, what curve am I getting when I plug in the calibrated parameters into the analytical formulae (assuming they exist for the model I'm ...
1
vote
0answers
47 views

How to compare market values with model values after calibration?

After calibration the G2++ model for interest (with swaption volatilities), I want to statistically test the quality of the calibration by comparing market to model values. What is the best way to ...
1
vote
0answers
80 views

Markov switching model estimation

We are testing Markov switching models to forecast risk regimes, similar to the paper by Kritzman, Page and Turkington. We find that in some cases the Baum-Welch algorithm converges very slowly or not ...
1
vote
0answers
112 views

What to do with linear regression or regression splines outside of the training range?

This is a cross-post from here In my question on a load forecast model using temperature data as covariates I was advised to use regression splines. This really seems to be a/the solution. Now I ...
0
votes
0answers
126 views

Calibration Problem in the LMM-Skew (Shifted Diffusion) Model

I have implemented the LIBOR market model (LMM) and I am quite satisfied with the results. I have now added a skew to the model as described in 10.1 of Brigo/Mercurio. That is, I have replaced the SDE ...
0
votes
0answers
58 views

Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?

Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) ...