• An Efficient Lattice Algorithm For The LIBOR Market Model

    Author(s):
    Tim Xiao (see profile)
    Date:
    2020
    Group(s):
    Business Management
    Subject(s):
    Value theory, Economics
    Item Type:
    Article
    Tag(s):
    LIBOR Market Model, lattice model, asset pricing, derivatives valuation, risk management
    Permanent URL:
    http://dx.doi.org/10.17613/d45n-zq38
    Abstract:
    The LIBOR Market Model has become one of the most popular models for pricing interest rate products. It is commonly believed that Monte-Carlo simulation is the only viable method available for the LIBOR Market Model. In this article, however, we propose a lattice approach to price interest rate products within the LIBOR Market Model by introducing a shifted forward measure and several novel fast drift approximation methods. This model should achieve the best performance without losing much accuracy. Moreover, the calibration is almost automatic and it is simple and easy to implement. Adding this model to the valuation toolkit is actually quite useful; especially for risk management or in the case there is a need for a quick turnaround.
    Metadata:
    Status:
    Published
    Last Updated:
    4 months ago
    License:
    All Rights Reserved
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