LIBOR Convexity Adjustments for the Vasicek and Cox-Ingersoll-Ross Models

Abstract

In this paper we numerically implement some of the recent theoretical results concerning convexity adjustments derived within the affine term structure setup. The computation of the convexity adjustments in that setup is reduced to solving a system of ODES. Here we explore the Vasicek and Cox-Ingersoll-Ross models within LIBOR-in-arrears and investigate how the convexity adjustments change with the model parameters. The two models reproduce the same behavior with the convexity adjustment showing up as an additive constant for maturity times > 5 years.

Keywords: Convexity adjustments, LIBOR-in-arrears, Vasicek, CIR

JEL Classification: E43, G13