Looking Forward to Backward-Looking Rates: Completing the Generalized Forward Market Model

22 Pages Posted: 15 Nov 2019

See all articles by Andrei Lyashenko

Andrei Lyashenko

Quantitative Risk Management, Inc.

Fabio Mercurio

Bloomberg L.P.

Date Written: November 6, 2019

Abstract

In this paper, we show how the generalized Forward Market Model (FMM) introduced by Lyashenko and Mercurio (2019) can be extended to make it a complete term-structure model describing the evolution of all points on a yield curve, as well as of the bank account, and not just of a spanning set of forward term rates. The extended model is both theoretically sound and computationally efficient.

The FMM is an extension of the popular Libor Market Model (LMM), so it can be also used to complete the yield curve evolution under existing LMM implementations.

Keywords: IBOR replacement, LMM, HJM, markovianity, market model, forward rates

JEL Classification: C22, C60, G12, G13

Suggested Citation

Lyashenko, Andrei and Mercurio, Fabio, Looking Forward to Backward-Looking Rates: Completing the Generalized Forward Market Model (November 6, 2019). Available at SSRN: https://ssrn.com/abstract=

Andrei Lyashenko

Quantitative Risk Management, Inc. ( email )

181 W. Madison St
Chicago, IL 60602
United States

Fabio Mercurio (Contact Author)

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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