Smooth Simultaneous Calibration of the LMM to Caplets and Coterminal Swaptions

Quantitative Finance, vol. 11 (4), pp.547 - 558

20 Pages Posted: 15 Feb 2008 Last revised: 15 Jul 2014

See all articles by Ferdinando M. Ametrano

Ferdinando M. Ametrano

Digital Gold Institute; CheckSig; Università Milano Bicocca - Crypto Asset Lab; Università Milano-Bicocca - Department of Statistics and Quantitative Methods; Catholic University of Milan (Brescia); QuantLib

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Date Written: February 12, 2008

Abstract

We introduce a new calibration methodology that allows perfect fitting of the displaced diffusion LIBOR market model to caplets and co-terminal swaptions, whilst avoiding global optimizations. The approach works by regarding a forward rate as a difference of swap-rates and then bootstrapping through rates one by one.

Keywords: market model, calibration, Bermudan swaptions

JEL Classification: G13

Suggested Citation

Ametrano, Ferdinando M. and Joshi, Mark, Smooth Simultaneous Calibration of the LMM to Caplets and Coterminal Swaptions (February 12, 2008). Quantitative Finance, vol. 11 (4), pp.547 - 558, Available at SSRN: https://ssrn.com/abstract=1092665 or http://dx.doi.org/10.2139/ssrn.1092665

Ferdinando M. Ametrano

Digital Gold Institute ( email )

Italy

HOME PAGE: http://dgi.io

CheckSig ( email )

Milan, 20121
Italy

HOME PAGE: http://checksig.io

Università Milano Bicocca - Crypto Asset Lab ( email )

Italy

HOME PAGE: http://cryptoassetlab.diseade.unimib.it/

Università Milano-Bicocca - Department of Statistics and Quantitative Methods ( email )

Milano, 20126
Italy

Catholic University of Milan (Brescia) ( email )

Milan
Italy

QuantLib ( email )

HOME PAGE: http://quantlib.org

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

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