Generic Market Models
2005-03-08
Research Paper
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Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. In this paper, we introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. The generic market model is particularly apt for pricing of Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- G3 : Corporate Finance and Governance
- E43 : Determination of Interest Rates; Term Structure of Interest Rates
- M : Business Administration and Business Economics; Marketing; Accounting
- G13 : Contingent Pricing; Futures Pricing
- C51 : Model Construction and Estimation
Automatically Extracted Terms
- model
- market
- libor
- market models
- discount bond prices
- discount
- agreement
- swap market models
- price
- libor market model
- swap agreements
- measure
- interest
- swaption
- correlation
- tenor
- payment
- market model
- drift
- volatility
