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How to calibrate Gaussian two-factor model using swaption


ABSTRACT: We propose an efficient approximation of the swaption normal volatility to estimate the mean reversion separately from the other volatility parameters in the Gaussian two-factor model. We compare our two-step approach with a one-step method that calibrates all parameters simultaneously. The comparison is based on the data from interest rate market of Korea and the US. The parameter estimates of our proposed two-step method are more stable than those of the one-step method in that the latter is overly sensitive to market changes whereas the former is not. The proposed approach also eliminates many existing problems in the Gaussian two-factor model.

SUBMITTER: Choi M 

PROVIDER: S-EPMC9949672 | biostudies-literature | 2023 Jan

REPOSITORIES: biostudies-literature

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