Amit Kumar Jha 🇮🇳
Quantitative Analyst at UBS | Ex- RBI | IIT Jodhpur
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Insights on Enhancing Vasicek Models with a Linear Deterministic Term for Bond PricingDerivation on the integration of a linear deterministic term within the Vasicek model framework to refine bond pricing techniques. This enhancement explicitly involves the inclusion of a linear deterministic short rate component, rt=α+βt+XtXt adheres to the classic Vasicek process.Key aspects of this research include:A detailed exploration of the analytical solution for the Vasicek model when it includes a linear deterministic term, which offers a more precise representation of interest rate behaviors.Development of a methodology for the calibration of α and β using regression analysis on market data. This approach ensures that the model closely mirrors empirical market conditions and improves its practical applicability.#Finance #QuantitativeFinance #RiskManagement #FinancialModeling #Mathematics #Economics
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Sid Bhatia
FE Strats SA @ GSAM | QF, FE, & ML Student-Athlete @ Stevens ‘25
3d
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Interesting. In terms of calibration of \alpha and \beta parameters for the Vasicek SDE Model, how are you ensuring that the requirements and assumption for regression are met?Empirically, does the market data for fixed-income instruments satisfy exogeneity, hom*oscedasticity, independently distributed Gaussian residuals, and no multicolinearity?What about other regressions such as LASSO/Ridge?If the assumptions are not met, how do you navigate that to ensure the accuracy of your model calibration?
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WinSavvy
4d
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Adding a linear deterministic term to the Vasicek model framework sounds like a promising approach to refining bond pricing techniques. By incorporating a more precise representation of interest rate behaviors, this enhancement could offer valuable insights for financial modeling and risk management strategies. I'm particularly intrigued by the methodology for calibrating α and β using regression analysis, as it ensures alignment with real-world market conditions. Looking forward to diving deeper into these insights!
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Allan Jonathan
D.Sc em Modelagem Computacional pelo Laboratório Nacional de Computação Científica
3d
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Sounds interesting. The Vasicek model plus the linear term you proposed preserves the affine diffusion of the model. Thus it is straightforward to develop some option formulas via Fourier methods for example so that one can test the pricing and vol smile performance.
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