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What are the characteristics of calibration

What are the characteristics of calibration?

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Calibration is common inside all markets, but is typically more complicated than in the simple illustration above. Interest rate models may have dozens of parameters or still entire functions to be selected by matching along with the market.

Therefore Calibration can frequently be time consuming. Calibration is an illustration of an inverse problem, wherein we know the answer (the prices of easy contracts) and need to find the problem (all the parameters). Inverse problems are notoriously complicated, for illustration being very sensitive to initial conditions. It can be misleading, because it suggests that your prices are accurate.

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