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On the calibration of a Gaussian Heath–Jarrow–Morton model using consistent forward rate curves

In this paper we propose a calibration algorithm, by using a consistent family of yield curves, that fits a Gaussian Heath–Jarrow–Morton model jointly to the implied volatilities of caps and zero-coupon bond prices. The calibration approach is evaluated in terms of in-sample data fitting as well as stability of parameter estimates. Furthermore, the efficiency is tested against a non-consistent traditional method by using simulated and market data. Also we discuss the convergence of the algorithm by means of Monte Carlo simulations.1 This work has been partially supported by the grant number GV05/280 from the Generalitat Valenciana.