Generic Market Models

28 Pages Posted: 16 Oct 2004

Date Written: August 2005 3,

Abstract

Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. In this paper, we introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. The generic market model is particularly apt for pricing of Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps.

Keywords: market model, generic market models, generic drift terms, hybrid products, BGM model

JEL Classification: M, G3, G13, E43, C51

Suggested Citation

Pietersz, Raoul and Van Regenmortel, Marcel, Generic Market Models (August 2005 3,). ERIM Report Series Reference No. ERS-2005-010-F&A. Available at SSRN: https://ssrn.com/abstract=605301

Marcel Van Regenmortel

ABN-Amro Bank, The Netherlands ( email )

NL-1000 EA Amsterdam
Netherlands

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