Interest Rate Model Calibration Using Semidefinite Programming
TITLE: Interest Rate Model Calibration Using Semidefinite Programming.
AUTHORS: Alexandre d'Aspremont
ABSTRACT: We show 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 centered around a BlackScholes 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.
STATUS: Applied Mathematical Finance 10(3), pp. 183213, September 2003.
ArXiv PREPRINT: cs.CE/0302034
SOFTWARE: A commercial implementation of the LMM calibration algorithm is available from RaisePartner.
PAPER: Interest Rate Model Calibration Using Semidefinite Programming in pdf
