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Posts: 38
Joined: August 20th, 2019, 12:40 pm

Calibration of displaced multi-factor short rate models

September 12th, 2021, 11:59 pm

Hello, I am reading about multi-factor short rate models, like CIR2++, CIR3++, 2-Factor Black-Karasinski model...

Analytical solution to price derivatives such as caps/swaptions does not exist for such models. A possible approach is to calibrate these models using Monte Carlo simulation. We generate scenarios using a set of parameters and then we price the derivate. Repeat the process by changing the values of the parameters and find a solution that minimizes the error. 

One could guess the initial values of the parameters by visualizing the vol surface. This could be wild guessing for a newbie.

Has anyone dealt with these models where a semi-analytical solution is available to price derivatives? 

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Joined: June 19th, 2008, 2:56 pm

Re: Calibration of displaced multi-factor short rate models

October 9th, 2021, 10:35 am

Easier to do asymptotic analysis for finding semi closed solutions