Libor market model under the real-world measure

Takashi Yasuoka

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    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 languageEnglish
    Article number1350024
    JournalInternational Journal of Theoretical and Applied Finance
    Volume16
    Issue number4
    DOIs
    Publication statusPublished - 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)

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