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calibration of LMM on current caps: simulated yield curves too high

Posted: June 9th, 2010, 7:21 am
by ntruwant
Hi,calibrating a LMM on caps (caplet) with underlying volatilities of 50% results in simulated yield curves attaigning levels of 30% interest rates, which is not realistic.Are there techniques to deduce more realistic underlying volatilities from the caps/caplets, that result in less extreme simulated yield curves?

calibration of LMM on current caps: simulated yield curves too high

Posted: June 9th, 2010, 9:41 am
by manolom
The point here is not that extreme scenarios occur, but how often.

calibration of LMM on current caps: simulated yield curves too high

Posted: June 11th, 2010, 2:56 am
by frattyquant
While I fully agree with manolom, you could set some sort of cap/floor in your algorithm that discards the paths in which the rate goes above a level you believe to be unreasonable.