Small Volatility Approximation and Multi-Factor HJM Models

TL;DR

This paper presents a method using Small Volatility Approximation for calibrating Multi-Factor HJM models with deterministic parameters, achieving high calibration quality regardless of the number of factors.

Contribution

It introduces a calibration approach leveraging Small Volatility Approximation for Multi-Factor HJM models with deterministic correlations and volatilities.

Findings

Calibration quality remains high across different numbers of factors

Small Volatility Approximation simplifies the calibration process

Method is effective for models with deterministic parameters

Abstract

Here we demonstrate how we can use Small Volatility Approximation in calibration of Multi-Factor HJM model with deterministic correlations, factor volatilities and mean reversals. It is noticed that quality of this calibration is very good and it does not depend on number of factors.