Economy – Quantitative Finance – Pricing of Securities
Scientific paper
2009-04-03
Economy
Quantitative Finance
Pricing of Securities
32 pages, 2 figures, submitted. Valuation formulas for swaptions in multi-factor models added
Scientific paper
We provide a general and flexible approach to LIBOR modeling based on the class of affine factor processes. Our approach respects the basic economic requirement that LIBOR rates are non-negative, and the basic requirement from mathematical finance that LIBOR rates are analytically tractable martingales with respect to their own forward measure. Additionally, and most importantly, our approach also leads to analytically tractable expressions of multi-LIBOR payoffs. This approach unifies therefore the advantages of well-known forward price models with those of classical LIBOR rate models. Several examples are added and prototypical volatility smiles are shown. We believe that the CIR-process based LIBOR model might be of particular interest for applications, since closed form valuation formulas for caps and swaptions are derived.
Keller-Ressel Martin
Papapantoleon Antonis
Teichmann Josef
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