WIAS Preprint No. 1113, (2006)

A jump-diffusion Libor model and its robust calibration



Authors

  • Belomestny, Denis
  • Schoenmakers, John G. M.
    ORCID: 0000-0002-4389-8266

2010 Mathematics Subject Classification

  • 60G51 62G20 60H05 60H10 90A09 91B28

Keywords

  • jump-diffusion Libor models, calibration, stability, correlation structure

Abstract

In this paper we propose a jump-diffusion Libor model with jumps in a high-dimensional space and test a stable non-parametric calibration algorithm which takes into account a given local covariance structure. The algorithm returns smooth and simply structured Lévy densities, and penalizes the deviation from the Libor market model. In practice, the procedure is FFT based, thus fast, easy to implement, and yields good results, particularly in view of the ill-posedness of the underlying inverse problem.

Appeared in

  • Quant. Finance, 11 (2011) pp. 529--546 .

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