Article
Version 1
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On the Calibration of the Kennedy Model
Version 1
: Received: 3 September 2024 / Approved: 4 September 2024 / Online: 5 September 2024 (02:44:32 CEST)
How to cite: Tóth-Lakits, D.; Arató, M. On the Calibration of the Kennedy Model. Preprints 2024, 2024090369. https://doi.org/10.20944/preprints202409.0369.v1 Tóth-Lakits, D.; Arató, M. On the Calibration of the Kennedy Model. Preprints 2024, 2024090369. https://doi.org/10.20944/preprints202409.0369.v1
Abstract
The Kennedy model offers a robust framework for modeling forward rates, leveraging Gaussian random fields to accommodate emerging phenomena such as negative rates. In our study, we employ maximum likelihood estimations to determine the parameters of the Kennedy field, utilizing Radon-Nikodym derivatives for enhanced accuracy. We introduce an efficient simulation method for the Kennedy field and develop a Black-Scholes-like analytical pricing formula for diverse financial assets. Additionally, we present a novel parameter estimation algorithm grounded in numerical extreme value optimization, enabling the recalibration of parameters based on observed financial product prices. To validate the efficacy of our approach, we assess its performance using real-world par swap rates in the latter part of this article.
Keywords
Kennedy model; calibration; term structure model; option pricing; interest rate swap; Gaussian random field; Heath-Jarrow-Morton framework; HJM model
Subject
Computer Science and Mathematics, Probability and Statistics
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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