Consistent Re-Calibration of the Discrete-Time Multifactor Vasiček Model

Philipp Harms, David Stefanovits, Josef Teichmann, Mario Wüthrich
2016 Risks  
The discrete-time multifactor Vasiček model is a tractable Gaussian spot rate model. Typically, two- or three-factor versions allow one to capture the dependence structure between yields with different times to maturity in an appropriate way. In practice, re-calibration of the model to the prevailing market conditions leads to model parameters that change over time. Therefore, the model parameters should be understood as being time-dependent or even stochastic. Following the consistent
more » ... ation (CRC) approach, we construct models as concatenations of yield curve increments of Hull-White extended multifactor Vasiček models with different parameters. The CRC approach provides attractive tractable models that preserve the no-arbitrage premise. As a numerical example, we fit Swiss interest rates using CRC multifactor Vasiček models.
doi:10.3390/risks4030018 fatcat:x6xdmctunrhg7d4vazsvd527tu