(Berlin : Weierstraß-Institut für Angewandte Analysis und Stochastik, 2006) Belomestrny, Denis; Schoenmakers, John G.M.
In this paper we propose a jump-diffusion Libor model with jumps in a
high-dimensional space and test a stable non-parametric calibration algorithm
which takes into account a given local covariance structure. The algorithm
returns smooth and simply structured Lévy densities, and penalizes the
deviation from the Libor market model. In practice, the procedure is FFT
based, thus fast, easy to implement, and yields good results, particularly in
view of the ill-posedness of the underlying inverse problem.
