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Interest rate model calibration using semidefinite Programming
Author:
A. D'Aspremont a
| Affiliation: | a The CMAPX, Ecole Polytechnique, Palaiseau, France |
DOI:
10.1080/1350486032000141002
Publication Frequency:
6 issues per year
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(English)
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Abstract
It is shown that, for the purpose of pricing swaptions, the swap rate and the corresponding forward rates can be considered lognormal under a single martingale measure. Swaptions can then be priced as options on a basket of lognormal assets and an approximation formula is derived for such options. This formula is centred around a Black-Scholes price with an appropriate volatility, plus a correction term that can be interpreted as the expected tracking error. The calibration problem can then be solved very efficiently using semidefinite programming.
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| Keywords: semidefinite programming; Libor market model; calibration; basket options |
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