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Old 08-05-2019, 10:15 PM
jano01 jano01 is offline
SOA CCA
 
Join Date: Oct 2017
College: Universite Libre de Bruxelles
Posts: 7
Default Scenario Modeling Module - Error?

Hi there,

I'd like to ask you your opinion on the MLE-based calibration of the CIR model (slide 253). They seem to fit a normal distribution based on the theoretical mean and variance, but CIR model theoretically yields to a non-central chi-square distribution (see the reading assignment in the previous slides, or Brigo-Mercurio for those who passed QFIA).

I would tend to say it might be valid if we use some kind of Central Limit theorem argument, but I can't see any other argument supporting that. Plus, the skew would also be exacerbated for very low rates if the model does not allow for negative rates.

Any thoughts? Did they do that only for the sake of simplicity?
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