Affine LIBOR models driven by real-valued affine processes

DOI10.1080/15326349.2015.1128339MaRDI QIDQ2811920zbMATH OpenOpenAlexFDO

Authors Wolfgang Müller, Stefan Waldenberger

Publication date 9 June 2016

Published in Stochastic Models (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1503.00864

zbMATH Keywords

affine processesforward price modelsLIBOR market modelsvolatility smile

Mathematics Subject Classification ID

Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: The class of affine LIBOR models is appealing since it satisfies three central requirements of interest rate modeling. It is arbitrage-free, interest rates are nonnegative and caplet and swaption prices can be calculated analytically. In order to guarantee nonnegative interest rates affine LIBOR models are driven by nonnegative affine processes, a restriction, which makes it hard to produce volatility smiles. We modify the affine LIBOR models in such a way that real-valued affine processes can be used without destroying the nonnegativity of interest rates. Numerical examples show that in this class of models pronounced volatility smiles are possible.

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Cites work

• A flexible matrix Libor model with smiles
• Affine processes are regular
• scientific article; zbMATH DE number 6283558 (Why is no real title available?)
• Interest rate models -- theory and practice. With smile, inflation and credit
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• Term structure models driven by general Lévy processes
• The affine LIBOR models
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• Time-inhomogeneous affine processes

Cited in

(7)

• Continuous tenor extension of affine LIBOR models with multiple curves and applications to XVA
• Affine processes under parameter uncertainty
• The affine LIBOR models
• A flexible matrix Libor model with smiles
• Affine LIBOR models with multiple curves: theory, examples and calibration
• The affine inflation market models
• Real-world scenarios with negative interest rates based on the LIBOR market model

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