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Libor Market Model Under The Real-World Measure

Author

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  • TAKASHI YASUOKA

    (Graduate School of Engineering Management, Shibaura Institute of Technology, 3-7-5 Toyosu, Koto-ku, Tokyo 135-8548, Japan)

Abstract

This paper consists of two parts. The first part aims to construct a LIBOR market model under the real-world measure (LMRW) according to the Jamshidian framework. Then, LIBOR rates, bond prices and a state price deflator are explicitly described under the LMRW. The second part aims to estimate the market price of risk, as well as to investigate the fundamental properties of real-world simulations. Then, the following subjects are theoretically investigated: (1) a method for determining the number of factors for real-world simulations, (2) the properties of real-world simulations, and (3) the value of the market price of risk in connection with sample data. Numerical examples demonstrate our results.

Suggested Citation

  • Takashi Yasuoka, 2013. "Libor Market Model Under The Real-World Measure," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-18.
    • Handle: RePEc:wsi:ijtafx:v:16:y:2013:i:04:n:s0219024913500246
    DOI: 10.1142/S0219024913500246
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    References listed on IDEAS

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    1. Felix Geiger, 2011. "The Yield Curve and Financial Risk Premia," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-21575-9, December.
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