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New and robust drift approximations for the LIBOR market model

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Author Info

  • Mark Joshi
  • Alan Stacey

Abstract

We present four new methods for approximating the drift in the LIBOR market model when performing very long steps. These are compared with a variety of existing methods, including PPR, Glasserman-Zhao and predictor-corrector. We find that two of them, which use correlation adjustments to better approximate the drift, are more effective than existing methods.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 8 (2008)
Issue (Month): 4 ()
Pages: 427-434

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Handle: RePEc:taf:quantf:v:8:y:2008:i:4:p:427-434

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Related research

Keywords: Financial mathematics; Financial modelling; Financial simulation; Financial engineering; Derivatives pricing; Derivative pricing models;

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Cited by:
  1. Antonis Papapantoleon & Maria Siopacha, 2009. "Strong Taylor approximation of stochastic differential equations and application to the L\'evy LIBOR model," Papers 0906.5581, arXiv.org, revised Oct 2010.
  2. Antonis Papapantoleon, 2009. "Old and new approaches to LIBOR modeling," Papers 0910.4941, arXiv.org, revised Apr 2010.
  3. Nicola Bruti-Liberati & Eckhard Platen, 2006. "On Weak Predictor-Corrector Schemes for Jump-Diffusion Processes in Finance," Research Paper Series 179, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Henrard, Marc, 2007. "Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options," MPRA Paper 1534, University Library of Munich, Germany.
  5. Antonis Papapantoleon & John Schoenmakers & David Skovmand, 2011. "Efficient and accurate log-L\'evy approximations to L\'evy driven LIBOR models," Papers 1106.0866, arXiv.org, revised Jan 2012.
  6. Antonis Papapantoleon & David Skovmand, 2010. "Numerical methods for the L\'evy LIBOR model," Papers 1006.3340, arXiv.org.
  7. Antonis Papapantoleon & David Skovmand, 2010. "Picard approximation of stochastic differential equations and application to LIBOR models," Papers 1007.3362, arXiv.org, revised Jul 2011.

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