Consistent re-calibration in yield curve modeling: An example

Abstract

Popular yield curve models include affine term structure models. These models are usually based on a fixed set of parameters which is calibrated to the actual financial market conditions. Under changing market conditions also parametrization changes. We discuss how parameters need to be updated with changing market conditions so that the re-calibration meets the premise of being free of arbitrage. We demonstrate this (consistent) re-calibration on the example of the Hull–White extended discrete-time Vasiček model, but this concept applies to a wide range of related term structure models.