Real World Interest Rate Modelling with the BGM Model
James P. Norman
Amlin Plc; EMB Consultancy LLP
September 29, 2009
This paper presents an interest rate model for real world risk management purposes which produces realistic yield curve movements, does not allow negative interest rates and is arbitrage free. The model is formulated in the BGM framework, with market prices of risk which limit the occurrence of "implausible" yield curve shapes. The paper illustrates a simple calibration procedure to obtain parameter estimates from historical data. Extensions of the model, such as a constant elasticity of variance model, are proposed and investigated.
Number of Pages in PDF File: 21
Keywords: BGM, Libor Market Model, Term Structure Models, Real World, Arbitrage Free, Econometric
JEL Classification: C22, C53, G12working papers series
Date posted: December 20, 2009
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