Negative Libor rates in the swap market model (Q2463709)

From MaRDI portal
scientific article
Language Label Description Also known as
English
Negative Libor rates in the swap market model
scientific article

    Statements

    Negative Libor rates in the swap market model (English)
    0 references
    0 references
    0 references
    16 December 2007
    0 references
    The purpose of this paper is to consider swap market model and to show that under the assumption of positive volatility functions for the swap rates, the implied Libor rates can become negative in finite time. The case in which the swap rates are modelled via a non-degenerate diffusion is simple, but the degenerate case is more difficult and the authors use in this case the Stroock and Varadhan's support theorem for diffusion processes. Some Monte Carlo simulations showing examples of the effect of negative values, are presented.
    0 references
    0 references
    forward swap rates
    0 references
    forward Libor rates
    0 references
    support theorem
    0 references
    0 references