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R. Pietersz (Raoul) and M. van Regenmortel

2005-03-08

Generic Market Models

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Publication

ERIM report series research in management Erasmus Research Institute of Management

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.

Additional Metadata
Keywords BGM model, generic drift terms, generic market models, hybrid products, market model
JEL Model Construction and Estimation (jel C51), Determination of Interest Rates; Term Structure of Interest Rates (jel E43), Contingent Pricing; Futures Pricing (jel G13), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
Persistent URL hdl.handle.net/1765/1907
Series ERIM Report Series Research in Management
Journal ERIM report series research in management Erasmus Research Institute of Management
Organisation Erasmus Research Institute of Management
Citation
Pietersz, R., & van Regenmortel, M. (2005). Generic Market Models (No. ERS-2005-010-F&A). ERIM report series research in management Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/1907
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