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Special Semester on Stochastics with Emphasis on Finance
Linz, September 2008 - December 2008
Presentation: A new approach to LIBOR modeling - application of affine processes

Workshop: Concluding Workshop

Time: Thu, December 04, 2008, 11:15-11:45

Speaker: Antonis Papapantoleon

Abstract

LIBOR market models for interest rate derivatives suffer from severe intractability problems; especially for models driven by jump processes, even caplets cannot be priced in closed form. On the other hand, modeling the forward price produces a very tractable model, but negative LIBOR rates can occur (similarly to HJM models).

In this work we propose a new approach to LIBOR modeling based on affine processes. We construct suitable martingales and then model LIBOR rates in a manner that produces positive LIBOR rates and is analytically very
tractable.

This talk is based on joint work with Josef Teichmann and Martin Keller-Ressel.

Presentation slides (pdf, 241 KB)

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