Bachelor´s Degree Project: Parameter estimation in interest rate models using Gaussian radial basis functions

Abstract: When modeling interest rates, using strong formulations of underlying differential equations is prone to bad numerical approximations and high computational costs, due to close to non-smoothness in the probability density function of the interest rate. To circumvent these problems, a weak formulation of the Fokker–Planck equation using Gaussian radial basis functions is suggested. This approach is used in a parameter estimation process for two interest rate models: the Vasicek model and the Cox–Ingersoll–Ross model. In this thesis, such an approach is shown to yield good numerical approximations at low computational costs.