IJPAM: Volume 108, No. 2 (2016)
CALIBRATED WITH CURRENT TERM STRUCTURE
X-027, Regency Park II, DLF City Phase IV
Gurgaon-122002, Haryana, INDIA
Abstract. It is desired of an interest rate model to be consistent with spot rates in the market. On the other hand, of interest is the behavior of asymptotic yield when the model is calibrated with initial term structure. In the present paper we show the interesting result that for an interest rate model calibrated with initial term structure, asymptotic yield of the resulting model is identical with initial forward rate, independent of the parameters involved in its short rate model. The result is first established for the Vasicek model using exact analysis and then, for a general four-parameter model where exact analysis seems intractable, through asymptotic analysis.
Received: April 4, 2016
Revised: April 4, 2016
Published: October 1, 2016
AMS Subject Classification: 91B24, 91B28, 91B30
Key Words and Phrases: interest rate models, calibration with initial term structure, asymptotic yield, initial forward rate, Vasicek model, general four-parameter model
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DOI: 10.12732/ijpam.v108i2.11 How to cite this paper?
Source: International Journal of Pure and Applied Mathematics
ISSN printed version: 1311-8080
ISSN on-line version: 1314-3395
Pages: 353 - 361