IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1503.00864.html
   My bibliography  Save this paper

Affine LIBOR models driven by real-valued affine processes

Author

Listed:
  • Stefan Waldenberger
  • Wolfgang Muller

Abstract

The class of affine LIBOR models is appealing since it satisfies three central requirements of interest rate modeling. It is arbitrage-free, interest rates are nonnegative and caplet and swaption prices can be calculated analytically. In order to guarantee nonnegative interest rates affine LIBOR models are driven by nonnegative affine processes, a restriction, which makes it hard to produce volatility smiles. We modify the affine LIBOR models in such a way that real-valued affine processes can be used without destroying the nonnegativity of interest rates. Numerical examples show that in this class of models pronounced volatility smiles are possible.

Suggested Citation

  • Stefan Waldenberger & Wolfgang Muller, 2015. "Affine LIBOR models driven by real-valued affine processes," Papers 1503.00864, arXiv.org.
  • Handle: RePEc:arx:papers:1503.00864
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1503.00864
    File Function: Latest version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ernst Eberlein & Sebastian Raible, 1999. "Term Structure Models Driven by General Lévy Processes," Mathematical Finance, Wiley Blackwell, vol. 9(1), pages 31-53.
    2. Da Fonseca, José & Gnoatto, Alessandro & Grasselli, Martino, 2013. "A flexible matrix Libor model with smiles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 774-793.
    3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    4. Zorana Grbac & Antonis Papapantoleon & John Schoenmakers & David Skovmand, 2014. "Affine LIBOR models with multiple curves: theory, examples and calibration," Papers 1405.2450, arXiv.org, revised Aug 2015.
    5. Christa Cuchiero & Josef Teichmann, 2011. "Path properties and regularity of affine processes on general state spaces," Papers 1107.1607, arXiv.org, revised Jan 2013.
    6. Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-209, March.
    7. Filipovic, Damir, 2005. "Time-inhomogeneous affine processes," Stochastic Processes and their Applications, Elsevier, vol. 115(4), pages 639-659, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1503.00864. 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: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.