I have been reading Wu's Interest rate modeling and in his chapter on the HJM model he says that

With arbitrage pricing models, the prices of the basic instruments are treated as model inputs rather than as outputs, so their prices are naturally reproduced.

This sentence sounds interesting but I cannot make sense of this. Does anyone have a good explanation? Thank you!

  • $\begingroup$ Can you give some more context? Seems similar to calibration where you calibrate model on vanilla payoffs. $\endgroup$ Sep 1 '19 at 13:47

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