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arXiv · 2203.07458

On the deterministic-shift extended CIR model in a negative interest rate framework

Marco Di Francesco·Kevin Kamm
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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 of 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.

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Marco Di Francesco, Kevin Kamm. 2022-03-14. On the deterministic-shift extended CIR model in a negative interest rate framework. https://arxiv.org/abs/2203.07458

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