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

• Main Authors: Philipp Harms, David Stefanovits, Josef Teichmann, Mario V. Wüthrich
• Format: Article
• Language: English
• Published: MDPI AG 2016-06-01
• Series: Risks
• Subjects: interest rate model; re-calibration; HJM model; Vasiček model; Hull–White extension
• Online Access: http://www.mdpi.com/2227-9091/4/3/18

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 re-calibration (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.