Generic market models

Generic market models

Currently, there are two market models for valuation and risk management of interest rate derivatives: the LIBOR and swap market models. We introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical...

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Veröffentlicht in:Finance and stochastics 2006-12, Vol.10 (4), p.507-528
Hauptverfasser: Pietersz, Raoul, van Regenmortel, Marcel
Format: Artikel
Sprache:eng
Schlagworte:
Agreements
Arbitrage
Calibration
Derivatives
Financial models
Financial research
Interest rates
Mathematical methods
Option pricing
Product development
Risk management
Stochastic models
Studies
Swaps
Swaptions
Valuation
Volatility
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Beschreibung
Zusammenfassung:Currently, there are two market models for valuation and risk management of interest rate derivatives: the LIBOR and swap market models. We introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. The generic market model is particularly apt for pricing of, e.g., Bermudan CMS swaptions and fixed-maturity Bermudan swaptions. [PUBLICATION ABSTRACT]
ISSN:0949-2984
1432-1122
DOI:10.1007/s00780-006-0023-3