Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
4960109 | European Journal of Operational Research | 2017 | 32 Pages |
Abstract
Measurement of a single interest rate curve is an important and well-studied inverse problem. To select plausible interest rate curves from the infinite set of possible interest rate curves, forward rates should be used in the regularization. By discretizing the interest rate curve it is shown that the inverse problem can be reformulated as a convex optimization model that can be efficiently solved using existing solvers. The convex optimization model can include bills, bonds, certificates of deposits, forward rate agreements and interest rate swaps using both equality constraints and inequality constraints that stem from bid/ask prices. The importance of an appropriate regularization and allowing for deviations from market prices to obtain stable forward rate curves is illustrated using market data.
Related Topics
Physical Sciences and Engineering
Computer Science
Computer Science (General)
Authors
Jörgen Blomvall,