Very Long-Stepping in the Spot Measure of the LIBOR Market Model

11 Pages Posted: 6 Aug 2009

See all articles by Christopher Beveridge

Christopher Beveridge

University of Melbourne - Centre for Actuarial Studies

Date Written: August 5, 2009

Abstract

It is widely believed that when evolving rates in the LIBOR market model to step over tenor dates the terminal measure must be used. We explain why this is not the case, and show that by very long stepping in the spot measure it is possible to obtain significant accuracy and standard error improvements, leading to substantial improvements in efficiency. In particular, we demonstrate that speed-ups of a factor in the thousands are possible when pricing auto-caps if the same drift approximation is used in both measures.

Keywords: LIBOR market model, spot measure, long step, auto-cap

JEL Classification: C19, G13

Suggested Citation

Beveridge, Christopher, Very Long-Stepping in the Spot Measure of the LIBOR Market Model (August 5, 2009). Available at SSRN: https://ssrn.com/abstract=1444260 or http://dx.doi.org/10.2139/ssrn.1444260

Christopher Beveridge (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

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