H. Tanimura (Japan)
Derivatives, LIBOR, parameter calibration, implied Corre lation Matrix .
In this paper a fast and simplified calibration method for the multi-factor Libor Market Model (LMM) is considered. At first the joint calibration method in the cap and swap tion market is provided using a new parameterization for the correlation matrix. Then we implement our proposed methodology for calibrating the Japanese cap and swaption markets. It is shown that the calibration technique proposed here is computationally tractable and provides a better esti mation for the implied correlation matrix in the LMM com pared to existing methods. The empirical analysis confirms that Black's swaption volatilities through our calibration fit the market data almost exactly and that the reduced order correlation matrix is smooth and realistic.
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