Real-World Scenarios With Negative Interest Rates Based on the LIBOR Market Model

Sara Dutra Lopes and Carlos Vázquez

Applied Mathematical Finance, 2018, vol. 25, issue 5-6, 466-482

Abstract: In this article, we present a methodology to simulate the evolution of interest rates under real-world probability measure. More precisely, using the multidimensional Shifted Lognormal LIBOR market model and a specification of the market price of risk vector process, we explain how to perform simulations of the real-world forward rates in the future, using the Euler‒Maruyama scheme with a predictor‒corrector strategy. The proposed methodology allows for the presence of negative interest rates as currently observed in the markets.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:25:y:2018:i:5-6:p:466-482

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DOI: 10.1080/1350486X.2018.1492348

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