D. Brigo and M. Morini (Italy)
Libor Market Model, calibration, swaptions, derivatives
We focus on the swaptions cascade calibration (CCA) for the LIBOR Market Model (LMM) first appeared in [1], al lowing direct correspondence between market volatilities and LMM parameters and a perfect recovery of market quotes. Previous tests showed numerical problems. We present here calibration cases leading to acceptable results, detecting their dependence on the correlation structure. We then devise a new algorithm with all positive characteristics of CCA while relying only on quoted market data. Empir ical results on a range of market situations and covariance assumptions show this algorithm to be robust and efficient. We Monte Carlo investigate the reliability of the underlying approximation and present possibilities to include informa tion from the cap market.
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