Re: Error "irregular fixings not (yet) supported" in LMM calibration with CapHelpers

Posted by LotharK on
URL: http://quantlib.414.s1.nabble.com/Re-Error-irregular-fixings-not-yet-supported-in-LMM-calibration-with-CapHelpers-tp6899p6900.html

Hey Luca,

I have pretty much the same problem as you: I also want to setup a QL LMM calibration and started to reconstruct the implementations in "libormarketmodel.cpp" of the testsuite.  

According to Brigo&Mercurio's "Interest Rate Models" (§6.4 ff) the purpose of the whole calibration process is the calibration to Caplet ATM volatilities and Swaption ATM volatilities. To this end, one chooses a certain constant-volatility model (e.g. the LmExtLinearExponentialVolModel, i.e.
sigma_{i} = phi_{i}((a(T_{i-1}-t)+d)*exp(-b(T_{i-1}-t))+c) and a certain correlation model (e.g. LmLinearExponentialCorrelationModel).

Then according to the book the parameters phi_{i} can be used to calibrate automatically caplet volatilities via: phi_{i}^2 = v_{i}[MKT]^2/(integral[0][T_{i-1}] sigma{i})^2, where v_{i}[MKT] are caplet volatilities inferred from market data. The additional free parameters a, b, c and d can be used for the swaption calibration.

The market provides quoted ATM Cap volatilities e.g. starting from 2Y tenor up to 5 years. I'm wondering now how to get the corresponding caplet volatilities for the above calibration? Is there any stripping algorithm in QL to recover the caplet volatilities from the market quoted cap volatilities?

It seems to me that the CapHelper doesn't provide such an algorithm and expects to get cap ATM volatilities and not caplet volatilities as an input. Or am I wrong?

Luca, did you find answers or solutions to your questions? If so, it would be great if shared them with me.
I'd really appreciate any kind of help or hint and hope that someone's experienced on such a special issue!

Best regards,
Lothar