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- Title
On the Deterministic-Shift Extended CIR Model in a Negative Interest Rate Framework.
- Authors
Di Francesco, Marco; Kamm, Kevin
- Abstract
In this paper, we propose a new exogenous model to address the problem of negative interest rates that preserves the analytical tractability of the original Cox–Ingersoll–Ross (CIR) model with a perfect fit to the observed term-structure. We use the difference between two independent CIR processes and apply the deterministic-shift extension technique. To allow for a fast calibration to the market swaption surface, we apply the Gram–Charlier expansion to calculate the swaption prices in our model. We run several numerical tests to demonstrate the strengths of this model by using Monte-Carlo techniques. In particular, the model produces close Bermudan swaption prices compared to Bloomberg's Hull–White one-factor model. Moreover, it finds constant maturity swap (CMS) rates very close to Bloomberg's CMS rates.
- Subjects
BLOOMBERG LP; INTEREST rates; HULL-White model; YIELD curve (Finance)
- Publication
International Journal of Financial Studies, 2022, Vol 10, Issue 2, p38
- ISSN
2227-7072
- Publication type
Article
- DOI
10.3390/ijfs10020038