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Measurement of interest rates using a convex optimization model
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, Faculty of Science & Engineering.
2017 (English)In: European Journal of Operational Research, ISSN 0377-2217, E-ISSN 1872-6860, Vol. 256, no 1, 308-316 p.Article in journal (Refereed) Published
Abstract [en]

Measurement of a single interest rate curve is an important and well-studied inverse problem. To select plausible interest rate curves from the infinite set of possible interest rate curves, forward rates should be used in the regularization. By discretizing the interest rate curve it is shown that the inverse problem can be reformulated as a convex optimization model that can be efficiently solved using existing solvers. The convex optimization model can include bills, bonds, certificates of deposits, forward rate agreements and interest rate swaps using both equality constraints and inequality constraints that stem from bid/ask prices. The importance of an appropriate regularization and allowing for deviations from market prices to obtain stable forward rate curves is illustrated using market data. (C) 2016 Elsevier B.V. All rights reserved.

Place, publisher, year, edition, pages
ELSEVIER SCIENCE BV , 2017. Vol. 256, no 1, 308-316 p.
Keyword [en]
Finance; OR in banking; Forward rate; Term structure; Non-linear optimization
National Category
Computational Mathematics
URN: urn:nbn:se:liu:diva-132462DOI: 10.1016/j.ejor.2016.05.053ISI: 000384854500028OAI: diva2:1046286
Available from: 2016-11-13 Created: 2016-11-12 Last updated: 2016-11-13

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Blomvall, Jörgen
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Production EconomicsFaculty of Science & Engineering
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