TY - CHAP
T1 - The LIBOR market model
T2 - A markov-switching jump diffusion extension
AU - Steinrücke, Lea
AU - Zagst, Rudi
AU - Swishchuk, Anatoliy
N1 - Publisher Copyright:
© Springer Science+Business Media New York 2014.
PY - 2014
Y1 - 2014
N2 - This paper demonstrates how the LIBOR Market Model of Brace et al. (Math Financ 7(2):127–147, 1997) and Miltersen et al. (J Financ 52(1):409–430, 1997) may be extended in a way that not only takes into account sudden market shocks without long-term effects, but also allows for structural breaks and changes in the overall economic climate. This is achieved by substituting the simple diffusion process of the original LIBOR Market model by a Markov-switching jump diffusion. Since interest rates of different maturities are modeled under different (forward) measures, we investigate the effects of changes between measures on all relevant quantities. Using the Fourier pricing technique, we derive pricing formula for the most important interest rate derivatives, caps/caplets, and calibrate the model to real data.
AB - This paper demonstrates how the LIBOR Market Model of Brace et al. (Math Financ 7(2):127–147, 1997) and Miltersen et al. (J Financ 52(1):409–430, 1997) may be extended in a way that not only takes into account sudden market shocks without long-term effects, but also allows for structural breaks and changes in the overall economic climate. This is achieved by substituting the simple diffusion process of the original LIBOR Market model by a Markov-switching jump diffusion. Since interest rates of different maturities are modeled under different (forward) measures, we investigate the effects of changes between measures on all relevant quantities. Using the Fourier pricing technique, we derive pricing formula for the most important interest rate derivatives, caps/caplets, and calibrate the model to real data.
UR - http://www.scopus.com/inward/record.url?scp=84955302904&partnerID=8YFLogxK
U2 - 10.1007/978-1-4899-7442-6_4
DO - 10.1007/978-1-4899-7442-6_4
M3 - Chapter
AN - SCOPUS:84955302904
T3 - International Series in Operations Research and Management Science
SP - 85
EP - 116
BT - International Series in Operations Research and Management Science
PB - Springer New York LLC
ER -