A Random Field LIBOR Market Model
Tao L. Wu and
Journal of Futures Markets, 2014, vol. 34, issue 6, 580-606
A random field LIBOR market model (RFLMM) is proposed by extending the LIBOR market model, with interest rate uncertainties modeled via a random field. First, closed‐form formulas for pricing caplet and swaption are derived. Then the random field LIBOR market model is integrated with the lognormal‐mixture model to capture the implied volatility skew/smile. Finally, the model is calibrated to cap volatility surface and swaption volatilities. Numerical results show that the random field LIBOR market model can potentially outperform the LIBOR market model in capturing caplet volatility smile and the pricing of swaptions, in addition to possessing other advantages documented in the previous literature (no need of frequent recalibration or to specify the number of factors in advance). © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:580–606, 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:34:y:2014:i:6:p:580-606
Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314
Access Statistics for this article
Journal of Futures Markets is currently edited by Robert I. Webb
More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().