15.3 Historical Volatility Specification


15.3 Historical Volatility Specification

Calibration to historical data could be performed in a manner similar to that described for implied volatility data. First a specific formulation of the HJM model is chosen , that is a specific volatility structure is imposed by specifying the number of volatility factors and their specific functional form. Time series of historical term structure data is used to determine the function parameters such that the specified functions fit the data as closely as possible. Such a restrictive approach may be desirable since a specific structure is imposed on the data, allowing for analytical prices of vanilla options. However, such a calibration procedure will not produce an exact match to market prices.

An approach more often applied to historical calibration is that of principal components which allows the number and specific structure of the volatility factors to be directly implied from the data.




Interest Rate Modelling
Interest Rate Modelling (Finance and Capital Markets Series)
ISBN: 1403934703
EAN: 2147483647
Year: 2004
Pages: 132

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net