Generic Market Models

Raoul Pietersz () and M. van Regenmortel
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M. van Regenmortel: Erasmus Research Institute of Management (ERIM), RSM Erasmus University

No ERS-2005-010-F&A Revision_Date: 2007-12-10, Research Paper from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

Abstract: Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. In this paper, 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 Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps.

Keywords: market model; generic market models; generic drift terms; hybrid products; BGM model (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2005-03-08

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Working Paper: Generic Market Models (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:eureri:30002053

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