Advanced Search
MyIDEAS: Login

Theory And Calibration Of Swap Market Models

Contents:

Author Info

  • S. Galluccio
  • J.-M. Ly
  • Z. Huang
  • O. Scaillet

Abstract

This paper introduces a general framework for market models, named Market Model Approach, through the concept of admissible sets of for-ward swap rates spanning a given tenor structure. We relate this concept to results in graph theory by showing that a set is admissible if and only if the associated graph is a tree. This connection enables us to enumerate all admissible models for a given tenor structure. Three main classes are identified within this framework, and correspond to the co-terminal, co-initial, and co-sliding model. We prove that the LIBOR market model is the only admissible model of a co-sliding type. By focusing on the co-terminal model in a lognormal setting, we develop and compare several approximating analytical formulae for caplets, while swaptions can be priced by a simple Black-type formula. A novel calibration technique is introduced to allow simultaneous calibration to caplet and swaption prices. Empirical calibration of the co-terminal model is shown to be faster, more robust and more efficient than the same procedure applied to the LIBOR market model. We then argue that the co-terminal approach is the simplest and most convenient market model for pricing and hedging a large variety of exotic interest-rate derivatives.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9965.2007.00296.x
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Wiley Blackwell in its journal Mathematical Finance.

Volume (Year): 17 (2007)
Issue (Month): 1 ()
Pages: 111-141

as in new window
Handle: RePEc:bla:mathfi:v:17:y:2007:i:1:p:111-141

Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627

Order Information:
Web: http://www.blackwellpublishing.com/subs.asp?ref=0960-1627

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Raoul Pietersz & Marcel Regenmortel, 2006. "Generic market models," Finance and Stochastics, Springer, vol. 10(4), pages 507-528, December.
    • Raoul Pietersz & Marcel van Regenmortel, 2005. "Generic Market Models," Finance 0502009, EconWPA.
    • Pietersz, R. & Regenmortel, M. van, 2005. "Generic Market Models," Research Paper ERS-2005-010-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bla:mathfi:v:17:y:2007:i:1:p:111-141

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.