Real World Interest Rate Modelling with the BGM Model

21 Pages Posted: 20 Dec 2009

Date Written: September 29, 2009

Abstract

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.

Keywords: BGM, Libor Market Model, Term Structure Models, Real World, Arbitrage Free, Econometric

JEL Classification: C22, C53, G12

Suggested Citation

Norman, James P, Real World Interest Rate Modelling with the BGM Model (September 29, 2009). Available at SSRN: https://ssrn.com/abstract=1480174 or http://dx.doi.org/10.2139/ssrn.1480174

James P Norman (Contact Author)

Amlin Plc ( email )

1, St Helens
Undershaft
London, EC3A 8ND
United Kingdom

EMB Consultancy LLP ( email )

Barley House
Station Road, Great Shelford
Cambridge, CB22 5LE
United Kingdom

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