Abstract
This paper consists of two parts. The first part aims to construct a LIBOR market model under the real-world measure (LMRW) according to the Jamshidian framework. Then, LIBOR rates, bond prices and a state price deflator are explicitly described under the LMRW. The second part aims to estimate the market price of risk, as well as to investigate the fundamental properties of real-world simulations. Then, the following subjects are theoretically investigated: (1) a method for determining the number of factors for real-world simulations, (2) the properties of real-world simulations, and (3) the value of the market price of risk in connection with sample data. Numerical examples demonstrate our results.
| Original language | English |
|---|---|
| Article number | 1350024 |
| Journal | International Journal of Theoretical and Applied Finance |
| Volume | 16 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 2013 Jun 1 |
Keywords
- LIBOR market model
- market price of risk
- principal component analysis
- real-world simulation
- term structure model
ASJC Scopus subject areas
- Finance
- Economics, Econometrics and Finance(all)