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Book chapters (2001), Mathematical Finance. Bachelier Congress 2000, Springer, pp. 407-426

Theory and Calibration of HJM with Shape Factors

RONCORONI Andrea , GUIOTTO P.

We construct arbitrage fee dynamics for the term structure of interest rates driven by infinitely many factors, each one representing a basic shape for the instantaneous forward rate curve in a given market. The consistency between a finite-dimensional space of polynomials where the curve is day-to-day recovered and the proposed evolution equation is investigated. The main result is the development of historical-implicit hybrid calibration procedure for our infinite-dimensional shape factor model. In this context, we also derive a pricing formula for caplets.

RONCORONI, A. and GUIOTTO, P. (2001). Theory and Calibration of HJM with Shape Factors. In: Mathematical Finance. Bachelier Congress 2000. 1st ed. Springer, pp. 407-426.