6533b859fe1ef96bd12b6e37
RESEARCH PRODUCT
THE CARMA INTEREST RATE MODEL
Arne AndresenFred Espen BenthValeriy ZakamulinSteen Koekebakkersubject
Vasicek modelBond optionInterest rate model short rate forward rate term structure CARMA process bond pricing bond option pricing yield curve volatility curve calibrationImplied volatilityBond valuationShort-rate modelForward rateShort rateForward volatilityEconometricsEconomicsLIBOR market modelYield curveVolatility (finance)General Economics Econometrics and FinanceFinanceAffine term structure modelRendleman–Bartter modelMathematicsdescription
In this paper, we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This model is able to present an adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provides closed-form solutions to bond prices, yields, bond option prices, and the term structure of forward rate volatility. We demonstrate the capabilities of our model by calibrating it to a panel of spot rates and the empirical volatility of forward rates simultaneously, making the model consistent with both the spot rate dynamics and forward rate volatility structure.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2014-03-01 | International Journal of Theoretical and Applied Finance |