Arbitrage-Free Interpolation in Models of Market Observable Interest Rates

Erik Schlogl

No 71, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Models which postulate lognormal dynamics for interest rates which are compounded according to market conventions, such as forward LIBOR or forward swap rates, can be constructed initially in a discrete tenor framework. Interpolating interest interest rates between maturities in the discrete tenor structure is equivalent to extending the model to continuous tenor. The present paper sets forth an alternative way of performing this extension; one which preserves the Markovian properties of the discrete tenor models and guarantees the positivity of all interpolated rates.

Pages: 18 pages
Date: 2001-12-01
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Citations: View citations in EconPapers (11)

Published as: Schlogl, E., 2002. "Arbitrage-Free Interpolation in Models of Market Observable Interest Rates", In: Sandmann, K., Schönbucher, P. (eds.) Advances in Finance and Stochastics, 187-218.

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Working Paper: Arbitrage-Free Interpolation in Models of Market Observable Interest Rates (2018)
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