Generic market models
type: Item
instance of: scholarly article
title: Generic market models
zbMATH Open document ID: 1126.91031
author: Raoul Pietersz
author: Marcel van Regenmortel
published in: Finance and Stochastics
publication date: 2007-05-29T00:00:00Z
review text: The authors introduce generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. The main outset of the paper is that a model is deemed proper for a certain interest rate derivative if the volatility of a rate that appears in the contract payoff has been calibrated correctly to the market volatility. The new angle of this paper is that no-arbitrage is considered in the market spanned at a given time point by the various forward swap rates in a generic market model. The conditions are provided that guarantee the absence of arbitrage in these static forward agreement markets for the generic setting. The necessary and sufficient conditions are derived for the structure of the forward rates to span an arbitrage-free economy in terms of relative discount bond prices, at all times. Generic expressions are developed for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. There is demonstrated how the instantaneous correlation of the generic forward rates can be calculated from the instantaneous correlation of forward LIBOR rates. The efficiency of drift calculations is discussed.
reviewed by: Yuliya S. Mishura
Mathematics Subject Classification ID: 91G20
Mathematics Subject Classification ID: 91G30
Mathematics Subject Classification ID: 60H30
Mathematics Subject Classification ID: 60G44
zbMATH DE Number: 5158698
zbMATH Keywords: generic market model
zbMATH Keywords: drift terms
zbMATH Keywords: constant maturity swap
zbMATH Keywords: Bermudan swaptions
MaRDI profile type: Publication
full work available at URL: s00780-006-0023-3
OpenAlex ID: W2170270831
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DOI: 10.1007/S00780-006-0023-3
description: scientific article; zbMATH DE number 5158698