LIBOR MARKET MODEL UNDER THE REAL-WORLD MEASURE

Takashi Yasuoka ()
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Takashi Yasuoka: Graduate School of Engineering Management, Shibaura Institute of Technology, 3-7-5 Toyosu, Koto-ku, Tokyo 135-8548, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 04, 1-18

Abstract: This paper consists of two parts. The first part aims to construct a LIBOR market model under the real-world measure (LMRW) according to the Jamshidian framework. Then, LIBOR rates, bond prices and a state price deflator are explicitly described under the LMRW. The second part aims to estimate the market price of risk, as well as to investigate the fundamental properties of real-world simulations. Then, the following subjects are theoretically investigated: (1) a method for determining the number of factors for real-world simulations, (2) the properties of real-world simulations, and (3) the value of the market price of risk in connection with sample data. Numerical examples demonstrate our results.

Keywords: LIBOR market model; term structure model; market price of risk; real-world simulation; principal component analysis (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S0219024913500246

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