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S. Acar, K.

Natcheva-Acar

A guide on the implementation


of the Heath-Jarrow-Morton Two-
Factor Gaussian Short Rate Model
(HJM-G2++)

Berichte des Fraunhofer ITWM, Nr. 170 (2009)


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Bericht 170 (2009)

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A Guide on the Implementation of the
Heath-Jarrow-Morton Two-Factor
Gaussian Short Rate Model (HJM-G2++)

Dr. Sarp Kaya Acar, Dr. Kalina Natcheva-Acar

July 23, 2009

Kaiserslautern, Germany
Contents

Contents

1 Introduction to the Heath-Jarrow-Morton Two-Factor Gaussian Model (HJM-


G2++) 2

1.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.2 Definition of the HJM-G2++ model . . . . . . . . . . . . . . . . . . . . . . . 2

1.3 Closed form solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.3.1 The price of a European option on a zero-coupon bond . . . . . . . . 6

1.3.2 The price of a caplet . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1.3.3 The price of a swaption . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.3.4 Implementation of the swaption semi closed-form formula . . . . . . 12

1.4 Degeneration to a one-factor model . . . . . . . . . . . . . . . . . . . . . . . 13

2 Numerical implementation 15

2.1 Monte Carlo simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.2 Tree construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

3 Calibration to market data 20

4 Conclusion 25

5 Appendix 26

1
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

1 Introduction to the Heath-Jarrow-Morton Two-Factor Gaussian Model


(HJM-G2++)

1.1 Motivation

In the literature, there are at least two equivalent two-factor Gaussian models for the
instantaneous short rate. These are the original two-factor Hull White model (see [3]) and
the G2++ one by Brigo and Mercurio (see [1]). Both these models first specify a time
homogeneous two-factor short rate dynamics and then by adding a deterministic shift
function ϕ(·) fit exactly the initial term structure of interest rates. However, the obtained
results are rather clumsy and not intuitive which means that a special care has to be taken
for their correct numerical implementation.

On the other side, as noticed by Heath-Jarrow-Morton (1992) (HJM), virtually any


exogenous short rate model can be derived within the HJM framework by choosing the
class of the forward rate volatilities. By starting within the HJM framework and limiting the
volatility of the forward rate to a deterministic, exponentially decaying one, we derive
another two-factor Gaussian short rate model which has a very simple and intuitive form.
Moreover, no fitting to the initial term structure is required as this is contained in the model
by its construction. Additionally, the dynamics of the underlying factors under the forward
risk-neutral measure is a very simple one, which facilitates the derivation of closed-form
solutions. We call the offered construction HJM-G2++ model due to its similarity to the
G2++ model of Brigo and Mercuirio.

In this report, we investigate the offered HJM-G2++ model and derive closed-form
solutions to the standard options needed for calibration purposes (caps, floors, bond
options and swaptions). Further, we calibrate the model parameters to at-the-monety
(ATM) Caps market volatilities and ATM swaption volatility surfaces and make comments
on the ability of the model to fit real market data.

Finally, we deal with different methods for the numerical implementation of HJM-G2++ for
pricing complex claims with no closed-form solution. For that purpose, we offer a Monte
Carlo simulation scheme and a lattice approximation with a construction similar to the one
of Li, Ritchken and Sankarasubramanian [4] (for the Cheyette model [2]).

1.2 Definition of the HJM-G2++ model

Let us assume that the instantaneous forward rate follows a two-factor HJM model and its
volatility is deterministic and given by
σ(t, T ) = σ1 e−κ1 (T −t) + σ2 e−κ2 (T −t)

2
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

with ki ∈ R+ , σi ∈ R+ , i = 1, 2. The forward rate equation for the so-defined volatility can
be witten as
2
" 2
#
X X
−κi (T −t)
f (t, T ) = f (0, T ) + e Xi (t) + bk (t, T )Zik (0, t) (1)
i=1 k=1

for

1 − e−κ1 (T −t)
b1 (t, T ) = , κ1 6= 0
κ1
b1 (t, T ) = T − t, κ1 = 0;
1 − e−κ2 (T −t)
b2 (t, T ) = , κ2 6= 0
κ2
b2 (t, T ) = T − t, κ2 = 0;

and cumulative quadrative variation that is defined as


Z t Z t
σ12 (1 − e−2κ1 (t−u) )
Z11 (u, t) = cov(X1 (s), X1 (s))ds = σ12 e−2κ1 (t−s) ds =
u u 2κ1
Z t
Z12 (u, t) = cov(X1 (s), X2 (s))ds
u
Z t
= Z21 (u, t) = ρ1,2 σ1 σ2 e−(κ1 +κ2 )(t−s) ds
u
ρσ1 σ2  
= 1 − e−(κ1 +κ2 )(t−u)
κ1 + κ2
Z t Z t
σ 2 (1 − e−κ2 (t−u) )
Z22 (u, t) = cov(X2 (s), X2 (s))ds = σ22 e−2κ2 (t−s) ds = 2
u u 2κ2

Using r(t) = f (t, t) we can find from (1) the short rate to be

r(t) = f (0, t) + X1 (t) + X2 (t) (2)

where following Cheyette’s model (see [2]) the state variables X1 (t) and X2 (t) are
respectively defined under an Equivalent Martingale Measure Q as
2
!
X
dX1 (t) = −κ1 X1 (t) + Z1,k (0, t) dt + σ1 dW̃1Q (t), X1 (0) = 0 (3)
k=1
2
!
X
dX2 (t) = −κ2 X2 (t) + Z2,k (0, t) dt + σ2 dW̃2Q (t), X2 (0) = 0 (4)
k=1

with correlation dhW˜ 1 , W˜ 2 it = ρdt.

3
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

The price of a zero coupon bond P (t, T ) at time t can easily be calculated using integration
of the forward rate to be
 RT  RT
P (t, T ) = E e− t r(s)ds |Ft = e− t f (t,u)du

P (0, T )
= exp − b1 (t, T )X1 (t) − b2 (t, T )X2 (t)
P (0, t)
2 
1 X
− bi (t, T )bj (t, T )Zij (0, t) .
2
i,j=1

1.3 Closed form solutions

Using the form of the analytical strong solution of a generalized linear stochastic
differential equation, we can write for s ≤ t
 Z t Z t
Xi (t) = e−κi (t−s) Xi (s) + Zi1 (s, u)eκi (u−s) du + Zi2 (s, u)eκi (u−s) du
s s
Z t 
+ σi eκi (u−s) dW̃iQ (u)
s
Z t Z t
−κi (t−s) −κi (t−u)
= Xi (s)e + Zi1 (s, u)e du + Zi2 (s, u)e−κi (t−u) du
s s
Z t
+ σi e−κi (t−u) dW̃iQ (u)
s

In specific for i = 1 we have


Z t Z t
X1 (t) = X1 (s)e−κ1 (t−s) + Z11 (s, u)e−κ1 (t−u) du + Z12 (s, u)e−κ1 (t−u) du
s s
Z t
+ σ1 e−κ1 (t−u) dW̃1Q (u)
s
Z t 2  
−κ1 (t−s) σ1 −2κ1 (u−s)
= X1 (s)e + 1−e e−κ1 (t−u) du
s 2κ 1
Z t Z t
ρ1,2 σ1 σ2  
+ 1−e −(κ1 +κ2 )(u−s)
e−κ1 (t−u)
du + σ1 e−κ1 (t−u) dW̃1Q (u)
s κ 1 + κ 2 s
2 −κ (t−s)
2
σ 1−e 1
= X1 (s)e−κ1 (t−s) + 1
2κ21
ρ1,2 σ1 σ2 h i
+ κ2 − (κ1 + κ2 )e−κ1 (t−s) + κ1 e−(κ1 +κ2 )(t−s)
(κ1 + κ2 )κ1 κ2
Z t
+ σ1 e−κ1 (t−u) dW̃1Q (u).
s

4
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

Thus, we have for the short rate for s ≤ t

r(t) = f (s, t) + X1 (t) + X2 (t)


2 2
σ 2 1 − e−κ1 (t−s) σ 2 1 − e−κ2 (t−s)
= X1 (s)e −κ1 (t−s)
+ X2 (s)e + 1
−κ2 (t−s)
+ 2
2κ21 2κ22
ρ1,2 σ1 σ2    
+ 1 − e−κ1 (t−s) 1 − e−κ2 (t−s)
κ1 κ2
Z t Z t
Q
+ σ1 e−κ1 (t−u)
dW̃1 (u) + σ2 e−κ2 (t−u) dW̃2Q (u)
s s

where

E Q r(t)|Fs = f (s, t) + X1 (s)e−κ1 (t−s) + X2 (s)e−κ2 (t−s)
σ2  2 σ2  2
+ 12 1 − e−κ1 (t−s) + 22 1 − e−κ2 (t−s)
2κ1 2κ
ρσ1 σ2   2 
+ 1 − e−κ1 (t−s) 1 − e−κ2 (t−s)
κ1 κ2
  σ 2 1 − e−2κ2 (t−s) 
 σ1 1 − e−2κ1 (t−s)
2
ρσ1 σ2 
VarQ r(t)|Fs = +2 1−e −(κ1 +κ2 )(t−s)
+ 2 .
2κ1 κ1 + κ2 2κ2
where we notice that the short rate process r(t) is conditionally Gaussian.

Denoting
 σ12 2 σ2 2
µr := E Q r(t)|F0 = f (0, t) +2 1 − e−κ1 t + 22 1 − e−κ2 t
2κ1 2κ2
ρσ1 σ2  
+ 1 − e−κ1 t 1 − e−κ2 t
κ1 κ2
  σ 2 1 − e−2κ2 t 
 σ1 1 − e−2κ1 t
2
ρσ1 σ2 
σr := VarQ r(t)|F0 = +2 1−e−(κ1 +κ2 )t
+ 2
2κ1 κ1 + κ2 2κ2

and using that the short rate is normally distributed with mean µr and variance σr we can
easily estimate the risk-neutral probability for the short rate to become negative to be
   
 µr

Q(r(t) < 0) = EQ 11{r(t)<0} = EQ 11 r(t)−µr µr =ϕ − >0
σr
<− σ
r σr

where ϕ(·) denotes the cumulative distribution function of the standard normal
distribution. We remark here that although the upper probability is in most cases negligibly
small, this is a definite drawback of the model.

Additionally, notice that the mean and the variance of the short rate in the HJM-G2++ and
in the G2++ are the same (see [1], p.147) which means that the two models produce

5
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

equivalent dynamics of the short rate. This will be used later in the proof of the derivation
of the closed-from solutions of caplets and bond options. However, the dynamics of the
underlying factors X1 (t) and X2 (t) are slightly different which leads also to a slightly
different closed-form solution for swaptions. For this reason, we will present in more
details the derivation of the swaption formula.

1.3.1 The price of a European option on a zero-coupon bond

Theorem 1.1. Using the already specified short rate dynamics, the price ZBC(t, T, S, K)
at time t of a European zero-bond call option with maturity T > t and strike K on a
zero-coupon bond with maturity S > T is calculated to
  P (t,S)  
ln KP (t,T ) + 12 Σp (t, T, S)2
ZBC(t, T, S, K) = P (t, S)Φ  
Σp (t, T, S)
  P (t,S)  
ln KP (t,T ) − 12 Σp (t, T, S)2
−P (t, T )K Φ  
Σp (t, T, S)

where Φ(·) denotes the cumulative standard normal distribution function and

Σ2p (t, T, S) := b1 (T, S)2 Z11 (t, T ) + b2 (T, S)2 Z22 (t, T ) + 2b1 (T, S)b2 (T, S)Z12 (t, T ).

The price ZBP(t, T, S, K) of a European bond put option is given by


   
P (t,S) 1 2
ln KP (t,T ) + Σ
2 p (t, T, S)
ZBP(t, T, S, K) = −P (t, S) Φ − 
Σp (t, T, S)
   
P (t,S) 1 2
ln KP (t,T ) − 2 Σp (t, T, S)
+P (t, T )K Φ − .
Σp (t, T, S)

Proof:
Due to the equivalence of the distribution of the short rate process r(t) in the 2FHW and in
the G2++ model, we refer for the proof to [1].

1.3.2 The price of a caplet

Theorem 1.2. Using the already specified short rate dynamics, the price
Caplet(t, T, S, K) at time t of a caplet resetting at time T > t, with payoff at time S > T

6
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

and strike K is calculated to


   
K ∗ P (t,T )
ln P (t,S) + 21 Σ2p (t, T, S)
Caplet(t, T, S, K) = P (t, T )Φ  
Σp (t, T, S)
  K ∗ P (t,T )  
1 2
1 ln P (t,S) − 2 Σ p (t, T, S)
− ∗ P (t, S)Φ  
K Σp (t, T, S)

1
with K ∗ = 1+K(S−T ) , Φ(·) denoting the cumulative standard normal distribution function
and

Σ2p (t, T, S) := b1 (T, S)2 Z11 (t, T ) + b2 (T, S)2 Z22 (t, T ) + 2b1 (T, S)b2 (T, S)Z12 (t, T ).

Proof: see [1].

1.3.3 The price of a swaption

Consider an European option giving the right at time t0 = T (maturity) to enter an interest
rate swap with payment times T = {t1 , . . . , tn } (reset times {t0 , . . . , tn−1 }), fixed leg rate
X and notional N . The year fraction from ti−1 to ti is denoted as usually by τi .
Theorem 1.3. The arbitrage-free price at time 0 of a European payer/receiver swaption is
given by numerically computing the following one-dimensional integral

ESp (0, T, T , N, K)
“x ”2
Z − 21 1 −µx1 " n
#
+∞
e σx1 X
βi (x1 )
= N P (0, T ) √ Φ (−h1 (x1 )) − λi (x1 )e Φ (−h2 (x1 )) dx1
−∞ σx1 2π i=1
(5)

and

ESr (0, T, T , N, K)
“x ”2
Z − 21 1 −µx1 " n
#
+∞
e σx1 X
= −N P (0, T ) √ Φ (h1 (x1 )) − λi (x1 )eβi (x1 ) Φ (h2 (x1 )) dx1
−∞ σx1 2π i=1
(6)

7
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

where
x¯2 − µx2 ρx1 x2 (x1 − µx1 )
h1 (x1 ) := p − p
σx2 1 − ρ2x1 x2 σx1 1 − ρ2x1 x2
q
h2 (x1 ) := h1 (x1 ) + b2 (T, ti )σx2 1 − ρ2x1 x2
λi (x1 ) := ci A(T, ti )e−b1 (T,ti )x1
 
1 2
 2 x1 − µ x 1
βi (x1 ) := −b2 (T, ti ) µx2 − 1 − ρx1 x2 σx2 b2 (T, ti ) + ρx1 x2 σx2
2 σx 1
R ti P2
f (0,u)du− 12
A(T, ti ) := e− T k,j=1 bk (T,ti )bj (T,ti )Zkj (0,T ) .

and c := {c1 , . . . , cn } such that ci := Xτi for i = 1, . . . , n − 1 and cn := 1 + Xτn .

In addition x̄2 = x̄2 (x1 ) is the unique solution of the following equation (found via
numerical methods)
n
X
ci A(T, ti )e−b1 (T,ti )x1 −b2 (T,ti )x2 = 1 (7)
i=1

and

µx 1 = µx 2 = 0
Z T
σx21 := σ12 e−2κ1 (T −u) du = Z11 (0, T )
0
Z T
σx22 := σ22 e−2κ2 (T −u) du = Z22 (0, T )
0
RT
ρ1,2 0 σ1 σ2 e−(κ1 +κ2 )(T −u) du Z12 (0, T )
ρx 1 x 2 := =p
σx 1 σx 2 Z11 (0, T )Z22 (0, T )

Proof:
We will consider only the case of a European payer swaption and the one for the receiver
will follow by analogy.

By definition of the payer swaption, we can write its discounted until time zero payoff as
n
!
R X
− 0T r(u)du +
Ne P (T, ti )τi (F (T, ti−1 , ti ) − X)
i=1

where the forward Libor rate is defined as


 
1 P (T, ti−1 ) − P (T, ti )
F (T, ti−1 , ti ) := , i = 1, . . . , n.
τi P (T, ti )

8
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

Using the definition of the forward Libor rate we can rewrite the payoff of the payer
swaption as
n n n
!+
R X X X
− 0T r(u)du
Ne P (T, ti−1 ) − P (T, ti ) − P (T, ti )τi X
i=1 i=1 i=1
n
!+
RT X
= N e− 0 r(u)du
1−X τi P (T, ti ) − P (T, tn )
i=1
n
!+
RT X
= N e− 0
r(u)du
1− ci P (T, ti ) .
i=1

Taking expectation under the forward QT measure we obtain that the price of the payer
swaption is given as
n
!+ !
X
QT
ESp (0, T, T , N, K) = N P (0, T )E 1− ci P (T, ti ) .
i=1

where
R ti
P (T, ti ) = e− T f (0,u)du
exp − b1 (T, ti )X1 (T ) − b2 (T, ti )X2 (T )

2
!
1 X
− bi (T, ti )bj (T, ti )Zij (0, T )
2
i,j=1

where the joint density of X1 (T ) and X2 (T ) under measure QT is denoted by f (x1 , x2 ).


Further, due to Result (1) in the Appendix, the dynamics of X1 (t) and X2 (t) under the
forward QT measure is given by
2
!
X
2
dX1 (t) = −κ1 X1 (t) + Z1,k (0, t) − b1 (t, T )σ1 − ρ1,2 b2 (t, T )σ1 σ2 dt
k=1
T
+σ1 dW1Q (t), X1 (0) = 0
2
!
X
dX2 (t) = −κ2 X2 (t) + Z2,k (0, t) − b2 (t, T )σ22 − ρ1,2 b1 (t, T )σ1 σ2 dt
k=1
T
q T
+ρ1,2 σ2 dW1Q (t) + 1 − ρ21,2 σ2 dW2Q (t), X2 (0) = 0

and using Result (2) of the Appendix, we can find conditioning on F0


Z T
T
X1 (T ) = −b1 (T, T )Z11 (0, T ) − b2 (T, T )Z12 (0, T ) + σ1 e−κ1 (T −u) dW1Q (u)
0
Z T
T
= σ1 e−κ1 (T −u) dW1Q (u)
0

9
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

and
Z T q Z T
T T
X2 (T ) = ρ1,2 σ2 e −κ2 (T −u)
dW1Q (u) + 1− ρ21,2 σ2 e−κ2 (T −u) dW2Q (u).
0 0

Thus,
T
E Q (X1 (T )|F0 ) := µx1 = 0
T
E Q (X2 (T )|F0 ) := µx2 = 0
T
V ar Q (X1 (T )|F0 ) := σx21 = Z11 (0, T )
T
V ar Q (X2 (T )|F0 ) := σx22 = Z22 (0, T )
RT
ρ1,2 0 σ1 (u)σ2 (u)e−(κ1 +κ2 )(T −u) du Z12 (0, T )
corr(X1 (T ), X2 (T )) := ρx1 x2 = =p
σx 1 σx 2 Z11 (0, T )Z22 (0, T )

and
  2  2 
x1 −µx1 (x −µ )(x −µ ) x2 −µx2
exp − 2(1−ρ12 ) σx1 − 2ρx1 x2 1 σxx1 σx2 x2 + σx2
x1 x2 1 2
f (x1 , x2 ) = p
2πσx1 σx2 1 − ρ2x1 x2

Hereon, the proof follows the same steps as in [1], p.163 but for completeness we will
present it in more details here.

n
!+ !
X
QT
ESp (0, T, T , N, K) = N P (0, T )E 1− ci P (T, ti )
i=1
Z R2 n
X R ti
= N P (0, T ) 1− ci e− T f (0,u)du

i=1
 2  !+
1 X
exp − b1 (T, ti )x1 − b2 (T, ti )x2 − bi (T, ti )bj (T, ti )Zij (0, T ) f (x1 , x2 )dx1 dx2
2
i,j=1
Z R2 n
!+
X
= N P (0, T ) 1− ci A(T, ti )e−b1 (T,ti )x1 −b2 (T,ti )x2 f (x1 , x2 )dx1 dx2
i=1

Next, freezing x1 and integrating over x2 we choose numerically x̄2 such that
n
X
ci A(T, ti )e−b1 (T,ti )x1 −b2 (T,ti )x̄2 = 1.
i=1

10
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

Then, denoting
1
λi (x1 ) := ci A(T, ti )e−b1 (T,ti )x1 , γ := q
2πσx1 σx2 1 − ρx1 x22
 
1 x1 − µ x 1 2 ρx 1 x 2 x1 − µ x 1
E(x1 ) := − , F (x1 ) :=
2(1 − ρ2x1 x2 ) σx 1 (1 − ρ2x1 x2 ) σx1 σx2
1
G(x1 ) :=
2(1 − ρ2x1 x2 )σx22

we have that
Z !
+∞ Z +∞ n
X
ESp (0, T, T , N, K) = N P (0, T ) 1− λi (x1 )e−b2 (T,ti )x2
−∞ x̄2 i=1
E(x1 )+F (x1 )(x2 −µx2 )−G(x1 )(x2 −µx2 )2
γe dx2 dx1
Z +∞ Z +∞
2
= N P (0, T ) γeE(x1 ) eF (x1 )(x2 −µx2 )−G(x1 )(x2 −µx2 ) dx2 dx1
−∞ x̄2
Z +∞ n
X Z +∞
E(x1 )−b2 (T,ti )µx2
−N P (0, T ) γe λi (x1 ) e(F (x1 )−b2 (T,ti ))(x2 −µx2 )
−∞ i=1 x̄2
−G(x1 )(x2 −µx2 )2
e dx2 dx1 .

Using that
Z √ " s ! s !#
b
−Ax2 +Bx π B2 B B
e = √ e 4A ϕ b 2A − √ − ϕ a 2A − √
a A 2A 2A

where ϕ(·) denotes the cumulative standard distribution function, we obtain

ESp (0, T, T , N, K)
Z +∞ √ " !#
π F (x1 )2 p F (x 1 )
= N P (0, T ) γeE(x1 ) p e 4G(x1 ) 1 − ϕ (x̄2 − µx2 ) 2G(x1 ) − p dx1
−∞ G(x1 ) 2G(x1 )
Z +∞ √ (F (x1 )−b2 (T,ti ))2
E(x1 ) π −b2 (T,ti )µx2 +
−N P (0, T ) γe p e fG

−∞ G(x1 )
n
" !#
X p F (x1 ) − b2 (T, ti )
λi (x1 ) 1 − ϕ (x̄2 − µx2 ) 2G(x1 ) − p .
i=1
2G(x 1 )

11
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

1.3.4 Implementation of the swaption semi closed-form formula

In this section, we shall devote some attention to the implementation of (semi-)closed


formula for the payer (resp. receiver) swaption price given by equation (5) (resp.(6) ), since
it requires numerical procedures of root finding and integration.

Let us consider the pricing formula of the payer swaption, given by equation (5).
According to authors best knowledge; one can compute the integral only numerically.

After intensive tests, see Table 1, we have chosen the 20 point Gaussian quadrature,
Z ∞ 19
X
g(x)dx ≈ wj g(xj )
−∞ j=0

where the weights and abscissas are set according to the Gauss-Legendre polynomials,
see [6].

The limits of the integration are set according to the fact that the integrand in formula (5)
is actually a bounded function against a normal distribution. See Figure 1. Hence, one can
truncate the domain of integration to the interval [µx1 − N σx1 , µx1 + N σx1 ], where N ∈ N.

Since the precision of the integral approximation is affected by the integral bounds, by
keeping in mind that the integrand is monotonic at the left and right wings, we have
chosen the constant N adaptively, according to the following algorithm.

1. Compute lower and upper bounds for N = 1: l = −N σx1 , u = N σx1


2. Compute the integrand at l and u
3. If Integrand(l) < 10−8 , set lower bound as l. Else increase N and go to step 1.
4. If Integrand(u) < 10−8 , set lower bound as u. Else increase N and go to step 1.

Now, let us consider the equation (7). We shall find the root of this equation. We bracket
the root in an interval [xl2 , xr2 ] and use a hybrid root finding algorithm, which is a
combination of Newton-Raphson and bisection algorithms. The numerical procedures that
we used can be found in [6]1 . The precision for the root finding algorithm is set to be
10E − 7., see Table 1.

In the view of Table 1, one observes a trade-off between the precision of the results and
the computing time. As a reasonable trade-off, we have chosen the 20 point
Gauss-Legendre and the precision 10e − 07 for the root finding algorithm.
1
Bracketing algorithm (zbrac) is in page 356 and root finding algorithm (rtsafe) is in page 370

12
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

0.2
(0.8, 0.5, 0.2, 0.1, −0.73)
0.18
(0.5, 0.3, 0.2, 0.2, −0.5 )
0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0
−1 −0.5 0 0.5 1

Figure 1 Plot of the integrand in formula (5) for a 1Y-swaption with an underlying 1Y swap and the underlying process has the
parameters (κ1 = 0.8, κ2 = 0.5,σ1 = 0.2, σ2 = 0.1, ρ = −0.73), (κ1 = 0.5, κ2 = 0.3,σ1 = 0.2, σ2 = 0.2, ρ = −0.5)

10e-05 10e-07 10e-09 10e-11


0.023053435634 0.023053435640 0.023053435634 0.023053435634
10
00:00:01.79 00:00:02.34 00:00:02.90 00:00:03.46
0.023073833332 0.023073766462 0.023073766455 0.023073766455
20
00:00:02.48 00:00:03.26 00:00:04.04 00:00:04.82
0.023073835520 0.023073766434 0.023073766427 0.023073766427
30
00:00:03.17 00:00:04.20 00:00:05.21 00:00:06.25
0.023073834632 0.023073766434 0.023073766427 0.023073766427
40
00:00:03.87 00:00:05.15 00:00:06.39 00:00:08.18

Table 1 Comparison of the sum of squared errors of the swaption surface calculated by different number of Gauss-Legendre polyno-
mials(on the rows) and different precisions of the root finding algorithm (on the columns).

1.4 Degeneration to a one-factor model

We want to investigate the conditions under which we can derive the one factor
Hull-White (extended Hull-White, Vasicek, from now on 1FHW) model as a special case of
the HJM-G2++ model introduced in Subsection 1.1.

e
Let us define X(t) := X1 (t) + X2 (t).

13
Introduction to the
Heath-Jarrow-Morton Two-Factor
Gaussian Model (HJM-G2++)

Proposition 1. Let us assume that the coefficients of the SDEs (3) and (4) satisfy

κ1 = κ2 , ρ = 0.

e
Then, X(t) satisfies the following SDE:
 
e
dX(t) = −e e + Z(0,
κX(t) e t) dt + σ
edW (t) (8)
p
e = κ1 = κ2 , σ
where κ e t) = Z11 (0, t) + Z22 (0, t), i.e., X̃ is a 1FHW
e = σ12 + σ22 , Z(0,
process.
Proof: Let us consider the strong solutions of SDEs (3) and (4)
Z t Z t
X1 (t) = X1 (s)e −κ1 (t−s)
+ −κ1 (t−u)
(Z11 (s, u) + Z12 (s, u)) e du + σ1 e−κ1 (t−u) dW̃1Q (u),
s s

Z t Z t
X2 (t) = X2 (s)e −κ2 (t−s)
+ −κ2 (t−u)
(Z21 (s, u) + Z22 (s, u)) e du + σ2 e−κ2 (t−u) dW̃2Q (u).
s s

Then,
e
X(t) := X1 (s)e−κ1 (t−s) + X2 (s)e−κ2 (t−s)
Z t Z t
+ (Z11 (s, u) + Z12 (s, u)) e−κ1 (t−u) du + (Z21 (s, u) + Z22 (s, u)) e−κ2 (t−u) du
s s
Z t Z t
+ σ1 e−κ1 (t−u) dW̃1Q (u) + σ2 e−κ2 (t−u) dW̃2Q (u).
s s

By substituting the assumptions in the above equation, we get


Z t
e
X(t) = (X1 (s) + X2 (s)) e−κ1 (t−s) + (Z11 (s, u) + Z22 (s, u)) e−κ1 (t−u) du
s
q Z t
+ σ12 + σ22 e−κ1 (t−u) dW̃ Q (u)
s
Z t Z t
e
= X(t)e −eκ(t−s)
+ e
Z(s, u)e −e
κ(t−u)
du + σe e−eκ(t−u) dW̃ Q (u)
s s

which is the solution of SDE (8).

14
Numerical implementation

2 Numerical implementation

Since no closed solutions are available for the prices of complex structured notes, we have
to use numerical methods for their approximation. For this purpose, we have chosen to use
a Monte Carlo simulation and a lattice approximation. In this section, we shall shortly
describe their implementation.

2.1 Monte Carlo simulation

For the Monte Carlo simulation we have chosen to use the classical Euler discretization
scheme of the driving stochastic differential equations (3) and (4). Then, if π is an arbitrary
discretization of [0, T ] such that 0 ≤ t0 < t1 < . . . < tn = T we have
2
!
X
X1π (ti+1 ) = X1π (ti ) + −κ1 X1π (ti ) + Z1,k (0, ti ) ∆tπi + σ1 ∆πi W1Q ,
k=1
X1 (0) = 0
!
2
X  p 
X2π (ti+1 ) = X2π (ti ) + −κ2 X2π (ti ) + Z2,k (0, ti ) ∆tπi + σ2 ρ∆πi W1Q + 1 − ρ2 ∆πi W2Q ,
k=1
X2 (0) = 0

with ∆πi := ti − ti−1 , ∆πi WjQ := WjQ (ti+1 )π − WjQ (ti )π , i = 1, . . . , n, j = 1, 2.

Q Q
Notice that we have decomposed the correlated Brownian motions W̃1 and W̃2 into a
linear combination of independent Brownian motions W1Q and W2Q using Cholesky
decomposition. In this form, it is straightforward to simulate the forward components
using Monte Carlo simulation. If Z1 and Z2 are both standard normally distributed
independent variables (i. e. Z1 , Z2 ∼ N (0, 1)) then we can rewrite the simulation scheme
as
2
!
X p
π π π
X1 (ti+1 ) = X1 (ti ) + −κ1 X1 (ti ) + Z1,k (0, ti ) ∆tπi + σ1 Z1 ∆tπi ,
k=1
X1 (0) = 0
!
2
X  p p p 
X2π (ti+1 ) = X2π (ti ) + −κ2 X2π (ti ) + Z2,k (0, ti ) ∆tπi + σ2 ρZ1 ∆tπi + 1 − ρ2 Z2 ∆tπi ,
k=1
X2 (0) = 0.

15
Numerical implementation

2.2 Tree construction

For shortness of the notations, let us denote the drifts of the two processes by
ν1 (t, X1 ) := −κ1 X1 (t) + Z11 (0, t) + Z12 (0, t) and
ν2 (t, X2 ) := −κ2 X2 (t) + Z21 (0, t) + Z22 (0, t).

Next, if we assume that at time t the tree is in state (xa1 , xa2 ) then at time t + ∆t it can
move to the following four states
 + +

xa1 , xa2 with probability puu
 + −

xa1 , xa2 with probability pud
 − +

xa1 , xa2 with probability pdu
 − −

xa1 , xa2 with probability pdd

Definition 2.1. Let us define the up and down jumps of both process by
+ √ − √
xa1 := xa1 + J1 (t, xa1 ) + 1 ∆tσ1 , xa1 := xa1 + J1 (t, xa1 ) − 1 ∆tσ1
+ √ − √
xa2 := xa2 + J2 (t, xa2 ) + 1 ∆tσ2 , xa2 := xa2 + J2 (t, xa2 ) − 1 ∆tσ2
where

Z1 if Z1 even,
J1 (t, xa1 ) :=
Z1 + 1 else.

Z2 if Z2 even,
J2 (t, xa2 ) :=
Z2 + 1 else.
h √ i h √ i
ν (t,xa ) ∆t ν (t,xa ) ∆t
for Z1 := floor 1 σ11 and Z2 := floor 2 σ22 .
Remark 2.1. We want to point out here that we cannot choose exactly
√ √
a ν1 (t, xa1 ) ∆t a ν2 (t, xa2 ) ∆t
J1 (t, x1 ) = , J2 (t, x1 ) =
σ1 σ2
because of two reasons
• If we want to construct a recombining tree we would like that the absolute value of the
up-jump and the absolute value of the down-jump are integer multiples of the same
jump heights. Notice that this will not be the case for real values of J1 (t, xa1 ) and
J2 (t, xa2 ). Therefore, we need a construction of J1 (t, xa1 ) and J2 (t, xa2 ) that allows them
to take only integer values;

• On the other side, if we choose simply


" √ # " √ #
ν1 (t, xa1 ) ∆t ν2 (t, xa2 ) ∆t
J1 (t, xa1 ) = floor , J2 (t, xa2 ) = floor
σ1 σ2

16
Numerical implementation

the tree will be allowed to expand endlessly, hence we will take no account of the
mean-reversion in the underlying processes. Finally, if we set

a Z1 if Z1 even,
J1 (t, x1 ) :=
Z1 + 1 else.

a Z2 if Z2 even,
J2 (t, x2 ) :=
Z2 + 1 else.
h √ i h √ i
ν1 (t,xa
1 ) ∆t ν2 (t,xa
2 ) ∆t
for Z1 := floor σ1 and Z2 := floor σ2 we notice that in a "normal
case" of not too strong mean reversion, the values of J1 (t, x1 ) and J2 (t, x2 ) will most of
the time be equal to zero. Thus, we will √ have a product of two binomial trees in the
usual sense. But as soon as |ν1 (t, x1 ) ∆t| > σ1 or in other words as soon as the local
mean dominates the local variance, the branching of the tree will be changed and thus
J1 (t, x1 ) and J2 (t, x2 ) will take the values of −2 in the upper part of the tree and of 2 in
the down part. Thus, we would have both required effects, namely that the local
variance will be approximately matched and the effect of mean reversion will be taken
into account.

Theorem 2.1. If the subsequent probabilities for the (xa1 , xa2 ) node are given by
" √ √ #
1 ρσ1 σ2 + (J1 − 1)(J2 − 1)σ1 σ2 − ν1 (t, xa1 ) ∆t(J2 − 1)σ2 − ν2 (t, xa2 ) ∆t(J1 − 1)σ1
puu =
4 σ1 σ2
" √ √ #
1 ρσ1 σ2 + (J1 + 1)(J2 + 1)σ1 σ2 − ν1 (t, xa1 ) ∆t(J2 + 1)σ2 − ν2 (t, xa2 ) ∆t(J1 + 1)σ1
pdd =
4 σ1 σ2
" √ √ #
1 −ρσ1 σ2 − (J1 − 1)(J2 + 1)σ1 σ2 + ν1 (t, xa1 ) ∆t(J2 + 1)σ2 + ν2 (t, xa2 ) ∆t(J1 − 1)σ1
pud =
4 σ1 σ2
" √ √ #
1 −ρσ1 σ2 − (J1 + 1)(J2 − 1)σ1 σ2 + ν1 (t, xa1 ) ∆t(J2 − 1)σ2 + ν2 (t, xa2 ) ∆t(J1 + 1)σ1
pdu =
4 σ1 σ2

then with the choice of jump heights given in Definition 2.1, the tree matches locally
perfectly the first and approximately the second moments of the underlying processes and
in addition, up to terms of order ∆t2 it matches the local covariance between the
underlying processes.
Proof: Denoting the approximated (with the lattice) local mean and variance respectively
b
with E(∆x c (∆xi ), for i = 1, 2 and the true local mean and variance of the
i ) and var
underlying process by E(∆xi ) and var(∆xi ), for i = 1, 2 we notice that matching the first

17
Numerical implementation

two moments implies that the risk-neutral tree probabilities have to solve

b a+ a a− a ! a
E(∆x 1 ) = (puu + pud )(x1 − x1 ) + (pdu + pdd )(x1 − x1 ) = E(∆x1 ) = ν1 (t, x1 )∆t
(9)
b 2 a+ a 2 a− a 2
E(∆x1 ) = (puu + pud )(x1 − x1 ) + (pdu + pdd )(x1 − x1 )
!
= E(∆x21 ) = σ12 ∆t + ν1 (t, xa1 )2 ∆t2 (10)
b a+ a a−a ! a
E(∆x 2 ) = (puu + pdu )(x2 − x2 ) + (pud + pdd )(x2 − x2 ) = E(∆x2 ) = ν2 (t, x2 )∆t
(11)
b 2 a+ a 2 a− a 2
E(∆x 2 ) = (p uu + p du )(x 2 − x 2 ) + (p du + p dd )(x 2 − x 2 )
!
= E(∆x22 ) = σ22 ∆t + ν2 (t, xa2 )2 ∆t2 (12)
b
E(∆x 1 ∆x2 ) = d
b
cov(∆x1 ∆x2 ) + E(∆x b
1 )E(∆x2 )
+ + + −
= puu (xa1 − xa1 )(xa2 − xa2 ) + pud (xa1 − xa1 )(xa2 − xa2 )
− + − −
+pdu (xa1 − xa1 )(xa2 − xa2 ) + pdd (xa1 − xa1 )(xa2 − xa2 )
!
= E(∆x1 ∆x2 ) = σ1 σ2 ρ∆t + ν1 (t, xa1 )ν(t, xa2 )∆t2 (13)
1 = puu + pud + pdu + pdd (14)

where ∆x1 and ∆x2 denote the changes in the respective processes x1 and x2 from time t
to time t + ∆t. Ignoring the terms of order ∆t2 in the matching of the correlation and
± ±
substituting with the definitions of xa1 and xa2 we solve equations (9), (11), (13) and (14)
for the four unknown probabilities and obtain
" √ √ #
1 ρσ1 σ2 + (J1 − 1)(J2 − 1)σ1 σ2 − ν1 (t, xa1 ) ∆t(J2 − 1)σ2 − ν2 (t, xa2 ) ∆t(J1 − 1)σ1
puu =
4 σ1 σ2
" √ √ #
1 ρσ1 σ2 + (J1 + 1)(J2 + 1)σ1 σ2 − ν1 (t, xa1 ) ∆t(J2 + 1)σ2 − ν2 (t, xa2 ) ∆t(J1 + 1)σ1
pdd =
4 σ1 σ2
" √ √ #
1 −ρσ1 σ2 − (J1 − 1)(J2 + 1)σ1 σ2 + ν1 (t, xa1 ) ∆t(J2 + 1)σ2 + ν2 (t, xa2 ) ∆t(J1 − 1)σ1
pud =
4 σ1 σ2
" √ √ #
1 −ρσ1 σ2 − (J1 + 1)(J2 − 1)σ1 σ2 + ν1 (t, xa1 ) ∆t(J2 − 1)σ2 + ν2 (t, xa2 ) ∆t(J1 + 1)σ1
pdu =
4 σ1 σ2

Next, let us calculate the local conditional variances for the already found probabilities first

18
Numerical implementation

for the x1 process:



b ∆x21 − E
c (∆x1 ) = E
var b (∆x1 )2
+ −
= (puu + pud )(xa1 − xa1 )2 + (pdu + pdd )(xa1 − xa1 )2 − ν1 (t, xa1 )2 ∆t2
√ !
ν1 (t, xa1 ) ∆t − (J1 − 1)σ1
= (1 + J1 )2 ∆tσ12
2σ1
√ !
ν1 (t, xa1 ) ∆t − (J1 − 1)σ1
+ 1− (1 − J1 )2 ∆tσ12 − ν1 (t, xa1 )2 ∆t
2σ1
q
= −J1 ∆tσ1 + 2ν1 (t, x1 )∆t ∆tσ12 J1 − ν1 (t, xa1 )2 ∆t + σ12 ∆t
2 2 a

= −(J1 ∆tσ1 − ν1 (t, xa1 )∆t)2 + σ12 ∆t
and since var (∆x1 ) = σ12 ∆t we have as in the rotated tree that the local variance is
approximately matched due to the right definition of the J1 process. By symmetry, the
same follows for the x2 process.

Notice that although the sum of the probabilities is one, they are not necessarily bounded
between 0 and 1. It can however be shown that when we increase the refinement, the
probabilities converge to values between 0 and 1 (see [5]). A similar problem is
encountered also in the Hull and White [3] 2-factor trinomial tree construction and also by
Brigo and Mercurio [1] in their G2++ quadrinomial tree construction. There are (at least)
three possible ways to proceed.

The first approach is to change the correlation coefficient at every node where the
probabilities are not bounded in [0, 1], until we have well-defined probabilities. Brigo and
Mercurio claim that this procedure although theoretically not consistent is practically
applicable as the correlation has a very negligible contribution to the result.

A second way, (considered by Zvan, Forsyth and Vetzal [7]) is to treat the probabilities of
the tree as weights and neglect that they are not properly defined. In this respect, the
authors show for a variety of finite difference constructions (although for rather regular
parameters) that the meshes allowing for negative coefficients satisfy discrete maximum
and minimum principles as the mesh size parameter approaches zero and show no obvious
oscillations in the level curves of the priced option values.

Here we follow the second standard approach in the construction of the quadrinomial tree,
since at least theoretically we can increase the refinement of the tree until we have
well-defined probabilities.

A third way to proceed is to define two new processes, constructed as a linear combination
of the original ones and orthogonal to each other (see [5]). The approximating tree for the
new orthogonal processes will have then well defined probabilities.

19
Calibration to market data

3 Calibration to market data

In this section we will fit the HJM-G2++ model to market ATM caps/floors volatilities and
ATM swaption volatility surfaces.

We will calibrate the model parameters by minimizing the squared differences between the
market and the model prices. For that reason, let us assume we have n market prices
Market price1 , . . . , Market pricen and with the same specifications for a parameter vector
Θ which we want to calibrate, we have n model prices Model price1 , . . . , Model pricen .
The objective function is the sum of the squared differences and is defined as
n
X
(Market pricei − Model pricei )2 .
i=1

Since most of the market prices are cited in BS volatilities, we define also the absolute
error between a one market BS volatility and its calibrated model correspondence as

absolute errori = |Market volatilityi − Model volatilityi | , i = 1, . . . , n.

In the implementation of the calibration of the HJM-G2++ we have the following inputs
and outputs:

Input: Output:

Initial yield curve Calibrated parameter values of


κ1 , κ2 , σ1 , σ2 , ρ

Market Caps/Floors or ATM Swaption Reports of the calibration results


volatilities or prices

Type of the used Solver - Local (Simplex) or


Global (Hybrid Asa) optimizer

The results of the calibration are delivered in Table 2 until Table 9.

20
Calibration to market data

0.06
ATM market volatility
18
0.058 ATM model volatility

0.056 17

0.054
16

Volatility in %
0.052
Yield

0.05 15

0.048
14

0.046
13
0.044

0.042 12
5 10 15 20 25 30 0 5 10 15 20
Time Maturity

(a) Initial term structure (b) At the money caps/floors market/model volatilities

Figure 2 Calibration to ATM Caps - data from 13.02.2001

0.056 21
ATM market volatility
20 ATM model volatility
0.054

19
0.052
18
Volatility in %

0.05 17
Yield

0.048 16

15
0.046
14

0.044
13

0.042 12
0 10 20 30 40 50 60 0 5 10 15 20
Time Maturity

(a) Initial term structure (b) At the money caps/floors market/model volatilities

Figure 3 Calibration to ATM Caps - data from 06.08.2008

21
Calibration to market data

0.04 70
ATM model volatility
65 ATM market volatility
0.035 60

55
0.03
50

Volatility in %
45
Yield

0.025
40

35
0.02
30

0.015 25

20

0.01 15
0 10 20 30 40 50 60 0 5 10 15 20
Time Maturity

(a) Initial term structure (b) At the money caps/floors market/model volatilities

Figure 4 Calibration to ATM Caps - data from 30.04.2009

4.5 80
ATM market volatility
4 ATM model volatility
70

3.5
60
3
Volatility in %

2.5 50
Yield

2 40

1.5
30
1

20
0.5

0 10
0 10 20 30 40 50 0 5 10 15 20 25 30
Time Maturity

(a) Initial term structure (b) At the money caps/floors market/model volatilities

Figure 5 Calibration to ATM Caps - data from 08.07.2009

22
Calibration to market data

18 5
Swaption BS implied volatility

16 4

Absolute error
14 3

12 2

10 1

8 0
10 10
10 10
8 8
5 6 5 6
4 4
2 2
Swaption maturity 0 0 Swaption maturity 0 0
Tenor Tenor

(a) At the money market swaption volatility surface (b) Calibration absolute error

Figure 6 Calibration to ATM Swaptions - data from 13.02.2001

25 6
Swaption BS implied volatility in %

5
20
Absolute error

15 3

2
10
1

5 0
30 30
30 30
20 20
20 20
10 10
10 10
Swaption maturity 0 0 Swaption maturity 0 0
Tenor Tenor

(a) At the money market swaption volatility surface (b) Calibration absolute error

Figure 7 Calibration to ATM Swaptions - data from 06.08.2008

23
Calibration to market data

60 60
Swaption BS implied volatility in %

50 50

Absolute error
40
40
30
30
20
20 10

10 0
30 30
30 30
20 20
20 20
10 10
10 10
Swaption maturity 0 0 Swaption maturity 0 0
Tenor Tenor

(a) At the money market swaption volatility surface (b) Calibration absolute error

Figure 8 Calibration to ATM Swaptions - data from 30.04.2009

60 15
Swaption BS implied volatility in %

50
Absolute error

10
40

30
5
20

10 0
30 30
30 30
20 20
20 20
10 10
10 10
Swaption maturity 0 0 Swpation maturity 0 0
Tenor Tenor

(a) At the money market swaption volatility surface (b) Calibration absolute error

Figure 9 Calibration to ATM Swaptions - data from 08.07.2009

24
Conclusion

4 Conclusion

We have presented the HJM-G2++ model which is a two-factor Gaussian short rate model,
equivalent to the original two-factor Hull and White model and the G2++ model by Brigo
and Mercurio. Although an equivalent representation, the model has (due to its derivation
within the HJM framework) a very intuitive form which does not need additional fitting to
the initial term structure and is an easier one for numerical implementation.

We have calibrated the HJM-G2++ model to different sets of market data of ATM
Caps/Floors volatilities and ATM Swaption volatility surfaces. The obtained results show
that due to its gaussian nature, the model is not suitable of fitting strongly humped
short-term effects. However, the model delivers satisfactory fitting to options with middle
and long-term maturities and is able to reproduce humped volatility structures.

Finally, we have offered a Monte Carlo simulation scheme and a lattice approximation as
numerical methods for pricing claims with no closed-form solution. As a more general
method for pricing structured notes, we consider here the tree approximation method
since it can be easily adapted for pricing derivatives with American features as well as
strongly path-dependent options (see [5]). Further, the lattice approximation scheme has a
faster convergence than the Monte Carlo methods. However, one can use the Monte Carlo
simulation results as a back-testing for the tree approximation.

25
Appendix

5 Appendix

Result (1) The equivalent T -forward risk-adjusted measure QT (associated with the bond
maturing at time T ) is defined as
dQT B(0)P (T, T )
= ,
dQ B(T )P (0, T )
where B(t) denotes the money-market account, driven by
dB(t) = B(t)r(t)dt, B(0) = 1.
Notice that
 R   R 
T T
dQT exp − 0 r(u)du exp − 0 [f (0, u) + X1 (u) + X2 (u)] du
= =
dQ P (0, T ) P (0, T )
 Z T 
= exp − [X1 (u) + X2 (u)] du .
0

Then we find that


Z T Z T Z T
1
X1 (u)du = σ12 b1 (u, T )2 du + b1 (u, T )σ1 dW̃1Q (u)
0 2 0 0
Z T
κ2 − (κ1 + κ2 )e−κ1 (T −u) + κ1 e−(κ1 +κ2 )(T −u)
+ρ1,2 σ1 σ2 du
0 κ1 κ2 (κ1 + κ2 )
and applying the same steps in the integration of the X2 -process, we obtain
Z T Z T Z Z
1 T 1 T
X1 (u)du + X2 (u)du = b1 (x, T )2 σ12 dx + b2 (x, T )2 σ22 dx
0 0 2 0 2 0
Z T
+ρ1,2 b1 (x, T )b2 (x, T )σ1 σ2 dx
0
Z T Z T
Q
+ b1 (x, T )σ1 dW̃1 (x) + b2 (x, T )σ2 dW̃2Q (x).
0 0

Further, we decompose the Brownian motions W̃1Q (t) and W̃2Q (t) into a sum of two
independent Brownian motions W1Q (t) and W2Q (t) such that

dW̃1Q (t) = dW1Q (t)


q
dW̃2Q (t) = ρ1,2 dW1Q (t) + 1 − ρ21,2 dW2Q (t)

26
Appendix

and then we can write


dQT h 1Z T Z
1 Tq 2
2
= exp − (b1 (x, T )σ1 + ρ1,2 b2 (x, T )σ2 (x)) dx − 1 − ρ21,2 b2 (x, T )σ2 dx
dQ 2 0 2 0
Z T Z Tq  i
− (b1 (x, T )σ1 + ρ1,2 b2 (x, T )σ2 ) dW1Q (x)− 1 − ρ21,2 b2 (x, T )σ2 dW2Q (x) .
0 0

Next, the Girsanov Theorem for the change of measure implies (referring to [1]) that the
T T
Brownian motions W1Q (t) and W2Q (t), under the forward measure QT , are given as
T
dW1Q (t) = dW1Q (t) + (b1 (t, T )σ1 + ρ1,2 b2 (t, T )σ2 ) dt
T
q
dW2Q (t) = dW2Q (t) + 1 − ρ21,2 b2 (t, T )σ2 dt.

T
Since W1Q (t) and W2Q (t) are independent Brownian motions, so are also W1Q (t) and
T
W2Q (t). Then, recalling that the processes X1 (t) and X2 (t) are given under the measure
Q as
2
!
X
dX1 (t) = −κ1 X1 (t) + Z1,k (0, t) dt + σ1 dW1Q (t), X1 (0) = 0
k=1
!
2
X q
dX2 (t) = −κ2 X2 (t) + Z2,k (0, t) dt + ρ1,2 σ2 dW1Q (t) + 1 − ρ21,2 σ2 dW2Q (t), X2 (0) = 0
k=1

we can write their dynamics under the forward QT measure as


2
!
X
dX1 (t) = −κ1 X1 (t) + Z1,k (0, t) − b1 (t, T )σ12 − ρ1,2 b2 (t, T )σ1 σ2 dt
k=1
T
+σ1 dW1Q (t), X1 (0) = 0
2
!
X
dX2 (t) = −κ2 X2 (t) + Z2,k (0, t) − b2 (t, T )σ22 − ρ1,2 b1 (t, T )σ1 σ2 dt
k=1
T
q T
+ρ1,2 σ2 dW1Q (t) + 1 − ρ21,2 σ2 dW2Q (t), X2 (0) = 0.

27
Appendix

Result (2): Under measure QT , we want to find X1 (t) and X2 (t) for t ≤ T . We have that
Z t Z t Z t
−κ1 (t−u) −κ1 (t−u)
X1 (t) = Z11 (0, u)e du + Z12 (0, u)e du − σ12 e−κ1 (t−u) b1 (0, T )du
0 0 0
Z t Z t
T
− ρ12 σ1 σ2 e−(κ1 +κ2 )(t−0) b2 (u, T )du + σ1 e−κ1 (t−u) dW1Q (u)
0 0
Z t Z t
= σ12 e−κ1 (t−u) b1 (0, t)du + ρ12 σ1 σ2 e−(κ1 +κ2 )(t−0) b2 (u, t)du
0 0
Z t Z t
2 −κ1 (t−u)
− σ1 e b1 (0, T )du − ρ12 σ1 σ2 e−(κ1 +κ2 )(t−0) b2 (u, T )du
0 0
Z t
T
+ σ1 e−κ1 (t−u) dW1Q (u)
0
Z t
T
= −b1 (t, T )Z11 (0, t) − b2 (t, T )Z12 (0, t) + σ1 e−κ1 (t−u) dW1Q (u)
0

Thus,
T
E Q (X1 (t)|F0 ) := −b1 (t, T )Z11 (0, t) − b2 (t, T )Z12 (0, t)
T
E Q (X2 (t)|F0 ) := −b2 (t, T )Z21 (0, t) − b2 (t, T )Z22 (0, t)
Z t
T
V ar Q (X1 (t)|F0 ) := σ12 e−2κ1 (t−u) du = Z11 (0, t)
0
Z t
T
V ar Q (X2 (t)|F0 ) := σ22 e−2κ2 (t−u) du = Z22 (0, t)
0
Rt
ρ1,2 0 σ1 σ2 e−(κ1 +κ2 )(t−u) du Z12 (0, t)
corr(X1 (t), X2 (t)) := p =p
Z11 (0, t)Z22 (0, t) Z11 (0, t)Z22 (0, t)

28
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Published reports of the 11. H. W. Hamacher, A. Schöbel
On Center Cycles in Grid Graphs
24. H. W. Hamacher, S. A. Tjandra
Mathematical Modelling of Evacuation
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2. M. Feldmann, S. Seibold
Damage Diagnosis of Rotors: Application 15. M. Junk, S. V. Raghurame Rao 27. A. Zemitis
of ­Hilbert Transform and Multi-Hypothe- A new discrete velocity method for Navier- On interaction of a liquid film with an obstacle
sis Testing Stokes equations Keywords: impinging jets, liquid film, models, numeri-
Keywords: Hilbert transform, damage diagnosis, (20 pages, 1999) cal solution, shape
Kalman filtering, non-linear dynamics
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Mathematics as a Key to Key Technologies 28. I. Ginzburg, K. Steiner
3. Y. Ben-Haim, S. Seibold (39 pages (4 PDF-Files), 1999) Free surface lattice-Boltzmann method to
Robust Reliability of Diagnostic Multi-
model the filling of expanding cavities by
Hypothesis Algorithms: Application to
17. J. Ohser, K. Sandau Bingham Fluids
Rotating Machinery Keywords: Generalized LBE, free-surface phenomena,
Keywords: Robust reliability, convex models, Kalman fil- Considerations about the Estimation of the
Size Distribution in Wicksell’s Corpuscle interface boundary conditions, filling processes, Bing-
tering, multi-hypothesis diagnosis, rotating machinery,
ham viscoplastic model, regularized models
crack diagnosis Problem
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29. H. Neunzert
4. F.-Th. Lentes, N. Siedow 18. E. Carrizosa, H. W. Hamacher, R. Klein,
»Denn nichts ist für den Menschen als Men-
Three-dimensional Radiative Heat Transfer S. Nickel
schen etwas wert, was er nicht mit Leiden-
in Glass Cooling Processes Solving nonconvex planar location prob-
schaft tun kann«
(23 pages, 1998) lems by finite dominating sets
Keywords: Continuous Location, Polyhedral Gauges,
Vortrag anlässlich der Verleihung des
Finite Dominating Sets, Approximation, Sandwich Algo- Akademie­preises des Landes Rheinland-
5. A. Klar, R. Wegener Pfalz am 21.11.2001
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A hierarchy of models for multilane vehicu- (19 pages, 2000) Keywords: Lehre, Forschung, angewandte Mathematik,
lar traffic Mehrskalenanalyse, Strömungsmechanik
Part I: Modeling (18 pages, 2001)
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A Review on Image Distortion Measures
Part II: Numerical and stochastic investigations Keywords: Distortion measure, human visual system 30. J. Kuhnert, S. Tiwari
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tion method for simulations of the incom-
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6. A. Klar, N. Siedow
Keywords: Incompressible Navier-Stokes equations,
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tion for Radiative Heat Transfer and Diffu- Polyhedral Properties of the Uncapacitated Least squares approximation
sion Equations: Applications to Glass Manu- Multiple Allocation Hub Location Problem AMS subject classification: 76D05, 76M28
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(24 pages, 1998) location, valid inequalities, facets, branch and cut
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31. R. Korn, M. Krekel
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Heterogeneous catalysis modelling and 21. H. W. Hamacher, A. Schöbel or Income Streams
numerical simulation in rarified gas flows Design of Zone Tariff Systems in Public Keywords: Portfolio optimisation, stochastic control,
Part I: Coverage locally at equilibrium Transportation HJB equation, discretisation of control problems
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Efficient Texture Analysis of Binary Images The Finite-Volume-Particle Method for Optimal portfolios with a loan dependent
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(16 pages, 2001) Keywords: Portfolio optimisation, stochastic control,
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9. J. Orlik non-linear wealth dynamics
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(25 pages, 2002)
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(20 pages, 1998) Location Software and Interface with GIS
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Multigrid – adaptive local refinement solver
Analog Circuit Design for incompressible flows
Keywords: CAD, automated analog circuit design, sym-
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projection-type splitting, SIMPLE, multigrid methods,
R. Wegener system simulation, circuit sizing, macro modeling, dif-
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Keywords: traffic flow, macroscopic equations, kinetic 55. V. Starikovicius
derivation, multivalued fundamental diagram, stop and 45. S. E. Mikhailov, J. Orlik
The multiphase flow and heat transfer in
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Keywords: Two-phase flow in porous media, various
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(11 pages, 2006)
77. K.-H. Küfer, M. Monz, A. Scherrer, P. Süss,
68. H. Neunzert F. Alonso, A. S. A. Sultan, Th. Bortfeld,
Mathematics as a Technology: Challenges D. Craft, Chr. Thieke 86. S. Panda, R. Wegener, N. Marheineke
for the next 10 Years Multicriteria optimization in intensity Slender Body Theory for the Dynamics of
Keywords: applied mathematics, technology, modelling, modulated radiotherapy planning Curved Viscous Fibers
simulation, visualization, optimization, glass processing, Keywords: multicriteria optimization, extreme solu- Keywords: curved viscous fibers; fluid dynamics; Navier-
spinning processes, fiber-fluid interaction, trubulence tions, real-time decision making, adaptive approxima- Stokes equations; free boundary value problem; asymp-
effects, topological optimization, multicriteria optimiza- tion schemes, clustering methods, IMRT planning, re- totic expansions; slender body theory
tion, Uncertainty and Risk, financial mathematics, Mal- verse engineering (14 pages, 2006)
liavin calculus, Monte-Carlo methods, virtual material (51 pages, 2005)
design, filtration, bio-informatics, system biology
87. E. Ivanov, H. Andrä, A. Kudryavtsev
(29 pages, 2004)
78. S. Amstutz, H. Andrä Domain Decomposition Approach for Auto-
A new algorithm for topology optimization matic Parallel Generation of Tetrahedral Grids
69. R. Ewing, O. Iliev, R. Lazarov, A. Naumovich using a level-set method Key words: Grid Generation, Unstructured Grid, Delau-
On convergence of certain finite difference Keywords: shape optimization, topology optimization, nay Triangulation, Parallel Programming, Domain De-
discretizations for 1­D poroelasticity inter- topological sensitivity, level-set composition, Load Balancing
face problems (22 pages, 2005) (18 pages, 2006)
Keywords: poroelasticity, multilayered material, finite
volume discretizations, MAC type grid, error estimates 88. S. Tiwari, S. Antonov, D. Hietel, J. Kuhnert,
79. N. Ettrich
(26 pages,2004)
Generation of surface elevation models for R. Wegener
urban drainage simulation A Meshfree Method for Simulations of In-
70. W. Dörfler, O. Iliev, D. Stoyanov, D. Vassileva Keywords: Flooding, simulation, urban elevation teractions between Fluids and Flexible
On Efficient Simulation of Non-Newto- models, laser scanning Structures
nian Flow in Saturated Porous Media with a (22 pages, 2005) Key words: Meshfree Method, FPM, Fluid Structure
Multigrid Adaptive Refinement Solver Interaction, Sheet of Paper, Dynamical Coupling
Keywords: Nonlinear multigrid, adaptive renement, (16 pages, 2006)
80. H. Andrä, J. Linn, I. Matei, I. Shklyar,
non-Newtonian in porous media
K. Steiner, E. Teichmann
(25 pages, 2004)
OPTCAST – Entwicklung adäquater Struk- 89. R. Ciegis , O. Iliev, V. Starikovicius, K. Steiner
turoptimierungsverfahren für Gießereien Numerical Algorithms for Solving Problems
71. J. Kalcsics, S. Nickel, M. Schröder Technischer Bericht (KURZFASSUNG) of Multiphase Flows in Porous Media
Towards a Unified Territory Design Approach Keywords: Topologieoptimierung, Level-Set-Methode, Keywords: nonlinear algorithms, finite-volume method,
– Applications, Algorithms and GIS Integration Gießprozesssimulation, Gießtechnische Restriktionen, software tools, porous media, flows
Keywords: territory desgin, political districting, sales CAE-Kette zur Strukturoptimierung (16 pages, 2006)
territory alignment, optimization algorithms, Geo- (77 pages, 2005)
graphical Information Systems
(40 pages, 2005)
90. D. Niedziela, O. Iliev, A. Latz Keywords: Elastic BVP, elastoplastic BVP, variational 109. Ph. Süss, K.-H. Küfer
On 3D Numerical Simulations of Viscoelastic inequalities, rate-independency, hysteresis, linear kine- Smooth intensity maps and the Bortfeld-
matic hardening, stop- and play-operator
Fluids Boyer sequencer
(21 pages, 2006)
Keywords: non-Newtonian fluids, anisotropic viscosity, Keywords: probabilistic analysis, intensity modulated
integral constitutive equation radiotherapy treatment (IMRT), IMRT plan application,
(18 pages, 2006) 100. M. Speckert, K. Dreßler, H. Mauch step-and-shoot sequencing
MBS Simulation of a hexapod based sus- (8 pages, 2007)

91. A. Winterfeld pension test rig


Application of general semi-infinite Pro- Keywords: Test rig, MBS simulation, suspension, 110. E. Ivanov, O. Gluchshenko, H. Andrä,
hydraulics, controlling, design optimization A. Kudryavtsev
gramming to Lapidary Cutting Problems
(12 pages, 2006)
Keywords: large scale optimization, nonlinear program- Parallel software tool for decomposing and
ming, general semi-infinite optimization, design center- meshing of 3d structures
ing, clustering 101. S. Azizi Sultan, K.-H. Küfer Keywords: a-priori domain decomposition, unstruc-
(26 pages, 2006) A dynamic algorithm for beam orientations tured grid, Delaunay mesh generation
in multicriteria IMRT planning (14 pages, 2007)
92. J. Orlik, A. Ostrovska Keywords: radiotherapy planning, beam orientation
Space-Time Finite Element Approximation optimization, dynamic approach, evolutionary algo- 111. O. Iliev, R. Lazarov, J. Willems
rithm, global optimization
and Numerical Solution of Hereditary Numerical study of two-grid precondition-
(14 pages, 2006)
Linear Viscoelasticity Problems ers for 1d elliptic problems with highly
Keywords: hereditary viscoelasticity; kern approxima- oscillating discontinuous coefficients
tion by interpolation; space-time finite element approxi- 102. T. Götz, A. Klar, N. Marheineke, R. Wegener Keywords: two-grid algorithm, oscillating coefficients,
mation, stability and a priori estimate A Stochastic Model for the Fiber Lay-down preconditioner
(24 pages, 2006) Process in the Nonwoven Production (20 pages, 2007)
Keywords: fiber dynamics, stochastic Hamiltonian sys-
93. V. Rutka, A. Wiegmann, H. Andrä tem, stochastic averaging 112. L. Bonilla, T. Götz, A. Klar, N. Marheineke,
(17 pages, 2006)
EJIIM for Calculation of effective Elastic R. Wegener
Moduli in 3D Linear Elasticity Hydrodynamic limit of the Fokker-Planck-
Keywords: Elliptic PDE, linear elasticity, irregular do- 103. Ph. Süss, K.-H. Küfer equation describing fiber lay-down pro-
main, finite differences, fast solvers, effective elas- Balancing control and simplicity: a variable cesses
tic moduli aggregation method in intensity modulated Keywords: stochastic dierential equations, Fokker-
(24 pages, 2006)
radiation therapy planning Planck equation, asymptotic expansion, Ornstein-
Keywords: IMRT planning, variable aggregation, clus- Uhlenbeck process
94. A. Wiegmann, A. Zemitis tering methods (17 pages, 2007)
EJ-HEAT: A Fast Explicit Jump ­Harmonic (22 pages, 2006)
­Averaging Solver for the Effective Heat 113. S. Rief
Conductivity of Composite Materials 104. A. Beaudry, G. Laporte, T. Melo, S. Nickel Modeling and simulation of the pressing
Keywords: Stationary heat equation, effective ther- Dynamic transportation of patients in hos- section of a paper machine
mal conductivity, explicit jump, discontinuous coeffi- pitals Keywords: paper machine, computational fluid dynam-
cients, virtual material design, microstructure simula- Keywords: in-house hospital transportation, dial-a-ride, ics, porous media
tion, EJ-HEAT dynamic mode, tabu search (41 pages, 2007)
(21 pages, 2006) (37 pages, 2006)
114. R. Ciegis, O. Iliev, Z. Lakdawala
95. A. Naumovich 105. Th. Hanne On parallel numerical algorithms for simu-
On a finite volume discretization of the Applying multiobjective evolutionary algo- lating industrial filtration problems
three-dimensional Biot poroelasticity sys- rithms in industrial projects Keywords: Navier-Stokes-Brinkmann equations, finite
tem in multilayered domains Keywords: multiobjective evolutionary algorithms, dis- volume discretization method, SIMPLE, parallel comput-
Keywords: Biot poroelasticity system, interface problems, crete optimization, continuous optimization, electronic ing, data decomposition method
finite volume discretization, finite difference method circuit design, semi-infinite programming, scheduling (24 pages, 2007)
(21 pages, 2006) (18 pages, 2006)
115. N. Marheineke, R. Wegener
96. M. Krekel, J. Wenzel 106. J. Franke, S. Halim Dynamics of curved viscous fibers with sur-
A unified approach to Credit Default Swap­ Wild bootstrap tests for comparing signals face tension
tion and Constant Maturity Credit Default and images Keywords: Slender body theory, curved viscous bers
Swap valuation Keywords: wild bootstrap test, texture classification, with surface tension, free boundary value problem
Keywords: LIBOR market model, credit risk, Credit De- textile quality control, defect detection, kernel estimate, (25 pages, 2007)
fault Swaption, Constant Maturity Credit Default Swap- nonparametric regression
method (13 pages, 2007)
(43 pages, 2006)
116. S. Feth, J. Franke, M. Speckert
Resampling-Methoden zur mse-Korrektur
107. Z. Drezner, S. Nickel und Anwendungen in der Betriebsfestigkeit
97. A. Dreyer Solving the ordered one-median problem in Keywords: Weibull, Bootstrap, Maximum-Likelihood,
Interval Methods for Analog Circiuts the plane Betriebsfestigkeit
Keywords: interval arithmetic, analog circuits, tolerance Keywords: planar location, global optimization, ordered (16 pages, 2007)
analysis, parametric linear systems, frequency response, median, big triangle small triangle method, bounds,
symbolic analysis, CAD, computer algebra numerical experiments
(36 pages, 2006) 117. H. Knaf
(21 pages, 2007)
Kernel Fisher discriminant functions – a con-
cise and rigorous introduction
98. N. Weigel, S. Weihe, G. Bitsch, K. Dreßler 108. Th. Götz, A. Klar, A. Unterreiter, Keywords: wild bootstrap test, texture classification,
Usage of Simulation for Design and Optimi- R. Wegener textile quality control, defect detection, kernel estimate,
zation of Testing Numerical evidance for the non-­existing of nonparametric regression
Keywords: Vehicle test rigs, MBS, control, hydraulics, solutions of the equations desribing rota- (30 pages, 2007)
testing philosophy
tional fiber spinning
(14 pages, 2006)
Keywords: rotational fiber spinning, viscous fibers, 118. O. Iliev, I. Rybak
boundary value problem, existence of solutions
On numerical upscaling for flows in hetero-
99. H. Lang, G. Bitsch, K. Dreßler, M. Speckert (11 pages, 2007)
geneous porous media
Comparison of the solutions of the elastic
and elastoplastic boundary value problems
Keywords: numerical upscaling, heterogeneous porous 128. M. Krause, A. Scherrer 137. E. Savenkov, H. Andrä, O. Iliev∗
media, single phase flow, Darcy‘s law, multiscale prob- On the role of modeling parameters in IMRT An analysis of one regularization approach
lem, effective permeability, multipoint flux approxima-
plan optimization for solution of pure Neumann problem
tion, anisotropy
Keywords: intensity-modulated radiotherapy (IMRT), Keywords: pure Neumann problem, elasticity, regular-
(17 pages, 2007)
inverse IMRT planning, convex optimization, sensitiv- ization, finite element method, condition number
ity analysis, elasticity, modeling parameters, equivalent (27 pages, 2008)
119. O. Iliev, I. Rybak uniform dose (EUD)
On approximation property of multipoint (18 pages, 2007)
138. O. Berman, J. Kalcsics, D. Krass, S. Nickel
flux approximation method The ordered gradual covering location
Keywords: Multipoint flux approximation, finite volume 129. A. Wiegmann problem on a network
method, elliptic equation, discontinuous tensor coeffi- Computation of the ­permeability of porous Keywords: gradual covering, ordered median function,
cients, anisotropy
materials from their microstructure by FFF- network location
(15 pages, 2007)
Stokes (32 pages, 2008)
Keywords: permeability, numerical homogenization,
120. O. Iliev, I. Rybak, J. Willems fast Stokes solver
139. S. Gelareh, S. Nickel
On upscaling heat conductivity for a class of (24 pages, 2007)
Multi-period public transport ­design: A
industrial problems novel model and solution a ­ pproaches
Keywords: Multiscale problems, effective heat conduc- 130. T. Melo, S. Nickel, F. Saldanha da Gama Keywords: Integer programming, hub location, public
tivity, numerical upscaling, domain decomposition
Facility Location and Supply Chain Manage- transport, multi-period planning, heuristics
(21 pages, 2007)
ment – A comprehensive review (31 pages, 2008)
Keywords: facility location, supply chain management,
121. R. Ewing, O. Iliev, R. Lazarov, I. Rybak network design
140. T. Melo, S. Nickel, F. Saldanha-da-Gama
On two-level preconditioners for flow in (54 pages, 2007)
Network design decisions in supply chain
porous media
planning
Keywords: Multiscale problem, Darcy‘s law, single 131. T. Hanne, T. Melo, S. Nickel Keywords: supply chain design, integer programming
phase flow, anisotropic heterogeneous porous media,
Bringing robustness to patient flow models, location models, heuristics
numerical upscaling, multigrid, domain decomposition,
manage­ment through optimized patient (20 pages, 2008)
efficient preconditioner
(18 pages, 2007) transports in hospitals
Keywords: Dial-a-Ride problem, online problem, case 141. C. Lautensack, A. Särkkä, J. Freitag,
study, tabu search, hospital logistics
122. M. Brickenstein, A. Dreyer K. Schladitz
(23 pages, 2007)
POLYBORI: A Gröbner basis framework Anisotropy analysis of pressed point pro-
for Boolean polynomials cesses
132. R. Ewing, O. Iliev, R. Lazarov, I. Rybak, Keywords: estimation of compression, isotropy test,
Keywords: Gröbner basis, formal verification, Boolean
J. Willems nearest neighbour distance, orientation analysis, polar
polynomials, algebraic cryptoanalysis, satisfiability
(23 pages, 2007) An efficient approach for upscaling proper- ice, Ripley’s K function
ties of composite materials with high con- (35 pages, 2008)
trast of coefficients
123. O. Wirjadi Keywords: effective heat conductivity, permeability of 142. O. Iliev, R. Lazarov, J. Willems
Survey of 3d image segmentation methods fractured porous media, numerical upscaling, fibrous
Keywords: image processing, 3d, image segmentation,
A Graph-Laplacian approach for calculating
insulation materials, metal foams
binarization the effective thermal conductivity of com-
(16 pages, 2008)
(20 pages, 2007) plicated fiber geometries
Keywords: graph laplacian, effective heat conductivity,
133. S. Gelareh, S. Nickel numerical upscaling, fibrous materials
124. S. Zeytun, A. Gupta New approaches to hub location problems (14 pages, 2008)
A Comparative Study of the Vasicek and the in public transport planning
CIR Model of the Short Rate Keywords: integer programming, hub location, trans-
Keywords: interest rates, Vasicek model, CIR-model,
143. J. Linn, T. Stephan, J. Carlsson, R. Bohlin
portation, decomposition, heuristic
calibration, parameter estimation Fast simulation of quasistatic rod deforma-
(25 pages, 2008)
(17 pages, 2007) tions for VR applications
Keywords: quasistatic deformations, geometrically
134. G. Thömmes, J. Becker, M. Junk, A. K. Vai- exact rod models, variational formulation, energy min-
125. G. Hanselmann, A. Sarishvili kuntam, D. Kehrwald, A. Klar, K. Steiner, imization, finite differences, nonlinear conjugate gra-
Heterogeneous redundancy in software A. Wiegmann dients
quality prediction using a hybrid Bayesian A Lattice Boltzmann Method for immiscible (7 pages, 2008)
approach multiphase flow simulations using the ­Level
Keywords: reliability prediction, fault prediction, non-
Set Method 144. J. Linn, T. Stephan
homogeneous poisson process, Bayesian model aver-
aging
Keywords: Lattice Boltzmann method, Level Set Simulation of quasistatic deformations us-
method, free surface, multiphase flow ing discrete rod models
(17 pages, 2007)
(28 pages, 2008) Keywords: quasistatic deformations, geometrically
exact rod models, variational formulation, energy min-
126. V. Maag, M. Berger, A. Winterfeld, K.-H. imization, finite differences, nonlinear conjugate gra-
135. J. Orlik
Küfer dients
Homogenization in elasto-plasticity
A novel non-linear approach to minimal Keywords: multiscale structures, asymptotic homogeni-
(9 pages, 2008)
area rectangular packing zation, nonlinear energy
Keywords: rectangular packing, non-overlapping con- (40 pages, 2008) 145. J. Marburger, N. Marheineke, R. Pinnau
straints, non-linear optimization, regularization, relax-
Adjoint based optimal control using mesh-
ation
(18 pages, 2007) 136. J. Almquist, H. Schmidt, P. Lang, J. Deitmer, less discretizations
M. Jirstrand, D. Prätzel-Wolters, H. Becker Keywords: Mesh-less methods, particle methods, Eul-
erian-Lagrangian formulation, optimization strategies,
Determination of interaction between
127. M. Monz, K.-H. Küfer, T. Bortfeld, C. Thieke adjoint method, hyperbolic equations
MCT1 and CAII via a mathematical and
Pareto navigation – systematic multi-crite- (14 pages, 2008
physiological approach
ria-based IMRT treatment plan determina-
Keywords: mathematical modeling; model reduction;
tion electrophysiology; pH-sensitive microelectrodes; pro- 146. S. Desmettre, J. Gould, A. Szimayer
Keywords: convex, interactive multi-objective optimiza- ton antenna Own-company stockholding and work effort
tion, intensity modulated radiotherapy planning (20 pages, 2008) preferences of an unconstrained executive
(15 pages, 2007)
Keywords: optimal portfolio choice, executive compen-
sation
(33 pages, 2008)
147. M. Berger, M. Schröder, K.-H. Küfer Keywords: Fiber-fluid interaction, slender-body theory, 166. J. I. Serna, M. Monz, K.-H. Küfer, C. Thieke
A constraint programming approach for the turbulence modeling, model reduction, stochastic dif- Trade-off bounds and their effect in multi-
ferential equations, Fokker-Planck equation, asymptotic
two-dimensional rectangular packing prob- criteria IMRT planning
expansions, parameter identification
lem with orthogonal orientations Keywords: trade-off bounds, multi-criteria optimization,
(21 pages, 2009)
Keywords: rectangular packing, orthogonal orienta- IMRT, Pareto surface
tions non-overlapping constraints, constraint propa- (15 pages, 2009)
gation 157. E. Glatt, S. Rief, A. Wiegmann, M. Knefel,
(13 pages, 2008) E. Wegenke 167. W. Arne, N. Marheineke, A. Meister, R. We-
Structure and pressure drop of real and vir- gener
148. K. Schladitz, C. Redenbach, T. Sych, tual metal wire meshes Numerical analysis of Cosserat rod and
M. Godehardt Keywords: metal wire mesh, structure simulation,
string models for viscous jets in rotational
model calibration, CFD simulation, pressure loss
Microstructural characterisation of open spinning processes
(7 pages, 2009)
foams using 3d images Keywords: Rotational spinning process, curved viscous
Keywords: virtual material design, image analysis, open fibers, asymptotic Cosserat models, boundary value
foams 158. S. Kruse, M. Müller problem, existence of numerical solutions
(30 pages, 2008) Pricing American call options under the as- (18 pages, 2009)
sumption of stochastic dividends – An ap-
149. E. Fernández, J. Kalcsics, S. Nickel, plication of the Korn-Rogers model 168. T. Melo, S. Nickel, F. Saldanha-da-Gama
R. Ríos-Mercado Keywords: option pricing, American options, dividends, An LP-rounding heuristic to solve a multi-
dividend discount model, Black-Scholes model
A novel territory design model arising in period facility relocation problem
(22 pages, 2009)
the implementation of the WEEE-Directive Keywords: supply chain design, heuristic, linear pro-
Keywords: heuristics, optimization, logistics, recycling gramming, rounding
(28 pages, 2008) 159. H. Lang, J. Linn, M. Arnold (37 pages, 2009)
Multibody dynamics simulation of geomet-
150. H. Lang, J. Linn rically exact Cosserat rods 169. I. Correia, S. Nickel, F. Saldanha-da-Gama
Keywords: flexible multibody dynamics, large deforma- Single-allocation hub location problems
Lagrangian field theory in space-time for
tions, finite rotations, constrained mechanical systems,
geometrically exact Cosserat rods with capacity choices
structural dynamics
Keywords: Cosserat rods, geometrically exact rods, Keywords: hub location, capacity decisions, MILP for-
(20 pages, 2009)
small strain, large deformation, deformable bodies, mulations
Lagrangian field theory, variational calculus (27 pages, 2009)
(19 pages, 2009) 160. P. Jung, S. Leyendecker, J. Linn, M. Ortiz
Discrete Lagrangian mechanics and geo- 170. S. Acar, K. Natcheva-Acar
151. K. Dreßler, M. Speckert, R. Müller, metrically exact Cosserat rods A guide on the implementation of the
Ch. Weber Keywords: special Cosserat rods, Lagrangian mechanics,
Heath-Jarrow-Morton Two-Factor Gaussian
Noether’s theorem, discrete mechanics, frame-indiffer-
Customer loads correlation in truck engi- Short Rate Model (HJM-G2++)
ence, holonomic constraints
neering (14 pages, 2009)
Keywords: short rate model, two factor Gaussian,
Keywords: Customer distribution, safety critical compo- G2++, option pricing, calibration
nents, quantile estimation, Monte-Carlo methods (30 pages, 2009)
(11 pages, 2009) 161. M. Burger, K. Dreßler, A. Marquardt,
M. Speckert
152. H. Lang, K. Dreßler Calculating invariant loads for system simu-
An improved multiaxial stress-strain correc- lation in vehicle engineering
Keywords: iterative learning control, optimal control Status quo: July 2009
tion model for elastic FE postprocessing
theory, differential algebraic equations(DAEs)
Keywords: Jiang’s model of elastoplasticity, stress-strain
(18 pages, 2009)
correction, parameter identification, automatic differ-
entiation, least-squares optimization, Coleman-Li algo-
rithm 162. M. Speckert, N. Ruf, K. Dreßler
(6 pages, 2009) Undesired drift of multibody models excit-
ed by measured accelerations or forces
153. J. Kalcsics, S. Nickel, M. Schröder Keywords: multibody simulation, full vehicle model,
force-based simulation, drift due to noise
A generic geometric approach to territory
(19 pages, 2009)
design and districting
Keywords: Territory design, districting, combinatorial
optimization, heuristics, computational geometry 163. A. Streit, K. Dreßler, M. Speckert, J. Lichter,
(32 pages, 2009) T. Zenner, P. Bach
Anwendung statistischer Methoden zur
154. Th. Fütterer, A. Klar, R. Wegener Erstellung von Nutzungsprofilen für die
An energy conserving numerical scheme for Auslegung von Mobilbaggern
the dynamics of hyper­elastic rods Keywords: Nutzungsvielfalt, Kundenbeanspruchung,
Keywords: Cosserat rod, hyperealstic, energy conserva- Bemessungsgrundlagen
tion, finite differences (13 pages, 2009)
(16 pages, 2009)
164. I. Correia, S. Nickel, F. Saldanha-da-Gama
155. A. Wiegmann, L. Cheng, E. Glatt, O. Iliev, Anwendung statistischer Methoden zur Er-
S. Rief stellung von Nutzungsprofilen für die
Design of pleated filters by computer sim- Auslegung von Mobilbaggern
ulations Keywords: Capacitated Hub Location, MIP formulations
Keywords: Solid-gas separation, solid-liquid separation, (10 pages, 2009)
pleated filter, design, simulation
(21 pages, 2009) 165. F. Yaneva, T. Grebe, A. Scherrer
An alternative view on global radiotherapy
156. A. Klar, N. Marheineke, R. Wegener optimization problems
Hierarchy of mathematical models for pro- Keywords: radiotherapy planning, path-connected sub-
duction processes of technical textiles levelsets, modified gradient projection method, improv-
ing and feasible directions
(14 pages, 2009)