The LIBOR Market Model

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 26 in Derivative Security Pricing, 2015, pp 569-604 from Springer

Abstract: Abstract The modifications to the Heath-Jarrow-Morton framework to cater for market quoted rates such as LIBOR rates were carried out by Brace and Musiela (Math Finance 4(3):259–283, 1994) Brace, A. Musiela, M. (henceforth BM). In this chapter, we first describe the BM parameterisation of the Heath–Jarrow–Morton model, and then we outline the choice of volatility functions that produces lognormal dynamics for LIBOR rates. We also discuss the pricing of interest rate caps and swaptions in this framework. In the final section, we summarise the earlier effort to price an interest rate caplet when the forward rate dynamics are Gaussian (i.e. the volatility function is only time dependent).

Keywords: Forward Rate; Bond Price; Equivalent Martingale Measure; Volatility Function; LIBOR Rate (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_26

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DOI: 10.1007/978-3-662-45906-5_26

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