The Levy Swap Market Model
AbstractModels driven by Levy processes are attractive since they allow for better statistical fitting than classical diffusion models. The dynamics of the forward swap rate process is derived in a semimartingale setting and a Levy swap market model is introduced. In order to guarantee positive rates, the swap rates are modelled as ordinary exponentials. The model starts with the most distant rate, which is driven by a non-homogeneous Levy process. Via backward induction the remaining swap rates are constructed such that they become martingales under the corresponding forward swap measures. Finally it is shown how swaptions can be priced using bilateral Laplace transforms.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 14 (2007)
Issue (Month): 2 ()
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