Interest Rate Model Calibration Using Semidefinite Programming
<|reference_start|>Interest Rate Model Calibration Using Semidefinite Programming: We show that, for the purpose of pricing Swaptions, the Swap rate and the corresponding Forward rates can be considered lognormal under a single martingale measure. Swaptions can then be priced as options on a basket of lognormal assets and an approximation formula is derived for such options. This formula is centered around a Black-Scholes price with an appropriate volatility, plus a correction term that can be interpreted as the expected tracking error. The calibration problem can then be solved very efficiently using semidefinite programming.<|reference_end|>
@article{d'aspremont2003interest,
    title={Interest Rate Model Calibration Using Semidefinite Programming},
    author={Alexandre d'Aspremont},
    journal={Applied Mathematical Finance 10(3), pp. 183-213, September 2003},
    year={2003},
    number={CMAPX-491},
    archivePrefix={arXiv},
    eprint={cs/0302034},
    primaryClass={cs.CE}
}