Common Correlation and Calibrating the Lognormal Forward Rate Model
1997 three papers that introduced very similar lognormal diffusion processes for interest rates appeared virtuously simultaneously. These models, now commonly called the 'LIBOR models' are based on either lognormal diffusions of forward rates as in Brace, Gatarek & Musiela (1997) and Miltersen, Sandermann & Sondermann (1997) or lognormal diffusions of swap rates, as in Jamshidian (1997). The consequent research interest in the calibration of the LIBOR models has engendered a growing empirical literature, including many papers by Brigo and Mercurio, and Riccardo Rebonato (www.fabiomercurio.it and www.damianobrigo.it and www.rebonato.com). The art of model calibration requires a reasonable knowledge of option pricing and a thorough background in statistics - techniques that are quite different to those required to design no-arbitrage pricing models. Researchers will find the book by Brigo and Mercurio (2001) and the forthcoming book by Rebonato (2002) invaluable aids to their understanding.
|Date of creation:||Jun 2002|
|Date of revision:||Jan 2003|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
- Miltersen, K. & K. Sandmann & D. Sondermann, 1994.
"Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates,"
Discussion Paper Serie B
308, University of Bonn, Germany.
- Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. " Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-30, March.
- Carol Alexander & Dimitri Lvov, 2003. "Statistical Properties of Forward Libor Rates," ICMA Centre Discussion Papers in Finance icma-dp2003-03, Henley Business School, Reading University.
When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2002-18. 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: (Ed Quick)
If references are entirely missing, you can add them using this form.