Affine Term-Structure Models: A Time-Changed Approach with Perfect Fit to Market Curves

@article{Mbaye2019AffineTM,
  title={Affine Term-Structure Models: A Time-Changed Approach with Perfect Fit to Market Curves},
  author={Cheikh Mbaye and Fr{\'e}d{\'e}ric Vrins},
  journal={Risk Management \& Analysis in Financial Institutions eJournal},
  year={2019}
}
  • Cheikh Mbaye, F. Vrins
  • Published 11 March 2019
  • Mathematics, Economics
  • Risk Management & Analysis in Financial Institutions eJournal
We address the so-called calibration problem which consists of fitting in a tractable way a given model to a specified term structure like, e.g., yield or default probability curves. Time-homogeneous jump-diffusions like Vasicek or Cox-Ingersoll-Ross (possibly coupled with compounded Poisson jumps, JCIR), are tractable processes but have limited flexibility; they fail to replicate actual market curves. The deterministic shift extension of the latter (Hull-White or JCIR++) is a simple but yet… 
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