A Unified View of LIBOR Models

DOI10.1007/978-3-319-45875-5_18MaRDI QIDQ4976510zbMATH OpenOpenAlexFDO

Authors Kathrin Glau, Zorana Grbac, Antonis Papapantoleon

Publication date 31 July 2017

Published in Springer Proceedings in Mathematics & Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1601.01352

zbMATH Keywords

affine Libor modelsforward priceLiborLibor market modelsLévy forward price modelssemimartingales

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We provide a unified framework for modeling LIBOR rates using general semimartingales as driving processes and generic functional forms to describe the evolution of the dynamics. We derive sufficient conditions for the model to be arbitrage-free which are easily verifiable, and for the LIBOR rates to be true martingales under the respective forward measures. We discuss when the conditions are also necessary and comment on further desirable properties such as those leading to analytical tractability and positivity of rates. This framework allows to consider several popular models in the literature, such as LIBOR market models driven by Brownian motion or jump processes, the L'evy forward price model as well as the affine LIBOR model, under one umbrella. Moreover, we derive structural results about LIBOR models and show, in particular, that only models where the forward price is an exponentially affine function of the driving process preserve their structure under different forward measures.

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Cited in

(9)

• Continuous tenor extension of affine LIBOR models with multiple curves and applications to XVA
• A new simulation approach to the LIBOR market model
• Affine LIBOR models driven by real-valued affine processes
• Libor market model under the real-world measure
• The affine LIBOR models
• L^2-theoretical study of the relation between the LIBOR market model and the HJM model
• TRIVARIATE SUPPORT OF FLAT-VOLATILITY FORWARD LIBOR RATES
• A tractable LIBOR model with default risk
• Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model

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