Calibrating short interest rate models in negative rate environments

The Journal of Derivatives Summer 2017, 24 (4) 80 - 92

In this paper, different calibration approaches for short-term interest rate models are explored in a negative interest rate environment. Russo and Fabozzi focus on the use of swaptions for calibration purposes testing three types of market quotes: implied volatility for swaptions under the Black/log-normal model, shifted log-normal model, and Bachelier/normal model. Standard one-factor short-term interest rate models are considered to evaluate the impact of alternative swaptions quotes calibrating the parameters in a market consistent setting.