The Levy Swap Market Model
Models 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.
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.
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.
Volume (Year): 14 (2007)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAMF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAMF20|
When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:14:y:2007:i:2:p:171-196. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.