Negative Libor rates in the swap market model

DOI10.1007/S00780-006-0032-2MaRDI QIDQ2463709zbMATH OpenOpenAlexFDO

Authors Mark H. A. Davis, Vicente Mataix-Pastor

Publication date 16 December 2007

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00780-006-0032-2

zbMATH Keywords

forward Libor ratesforward swap ratessupport theorem

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stochastic models in economics (91B70)

Review text

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.

Recommendations

• BIVARIATE SUPPORT OF FORWARD LIBOR AND SWAP RATES
• LIBOR and swap market models and measures
• TRIVARIATE SUPPORT OF FLAT-VOLATILITY FORWARD LIBOR RATES
• Towards a central interest rate model
• The Lévy Swap Market Model

Cites work

• BIVARIATE SUPPORT OF FORWARD LIBOR AND SWAP RATES
• Continuous-time term structure models: Forward measure approach
• Generic market models
• scientific article; zbMATH DE number 3780265 (Why is no real title available?)
• scientific article; zbMATH DE number 1515832 (Why is no real title available?)
• scientific article; zbMATH DE number 3403582 (Why is no real title available?)
• LIBOR and swap market models and measures
• The Market Model of Interest Rate Dynamics
• THEORY AND CALIBRATION OF SWAP MARKET MODELS

Cited in

(8)

• How to handle negative interest rates in a CIR framework
• Admissibility of generic market models of forward swap rates
• BIVARIATE SUPPORT OF FORWARD LIBOR AND SWAP RATES
• TRIVARIATE SUPPORT OF FLAT-VOLATILITY FORWARD LIBOR RATES
• Arbitrage-free interpolation of the swap curve
• Negative rates: new market practice
• The Lévy Swap Market Model
• Real-world scenarios with negative interest rates based on the LIBOR market model

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