The Lévy LIBOR model
AbstractModels driven by Lévy processes are attractive because of their greater flexibility compared to classical diffusion models. First we derive the dynamics of the LIBOR rate process in a semimartingale as well as a Lévy Heath-Jarrow-Morton setting. Then we introduce a Lévy LIBOR market model. In order to guarantee positive rates, the LIBOR rate process is constructed as an ordinary exponential. Via backward induction we get that the rates are martingales under the corresponding forward measures. An explicit formula to price caps and floors which uses bilateral Laplace transforms is derived. Copyright Springer-Verlag Berlin/Heidelberg 2005
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 9 (2005)
Issue (Month): 3 (07)
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Web page: http://www.springerlink.com/content/101164/
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- Kohatsu-Higa, Arturo & Tankov, Peter, 2010. "Jump-adapted discretization schemes for Lévy-driven SDEs," Stochastic Processes and their Applications, Elsevier, vol. 120(11), pages 2258-2285, November.
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