An alternative approach to the calibration of the Vasicek and CIR interest rate models via generating functions

Authors

Marianito Rodrigo, University of WollongongFollow
Rogemar Mamon, University of Western Ontario

RIS ID

86637

Publication Details

Rodrigo, M. R. & Mamon, R. S. (2014). An alternative approach to the calibration of the Vasicek and CIR interest rate models via generating functions. Quantitative Finance, 14 (11), 1961-1970.

Abstract

We propose a new method to calibrate the Vasicek and Cox--Ingersoll--Ross interest rate models from bond prices. We define an appropriate generating function and derive recursive relations between the derivatives of the generating function and the bond prices. The parameters of the Vasicek and CIR models are then obtained by solving a system of linearly independent equations arising from the recursive relations. We include numerical results that show the method's accuracy when bond prices generated from the exact formulas are used.