LIBOR market model

The LIBOR Markt Modell is an interest rate model used for the pricing of interest rate derivatives, especially for complex derivatives. The model primitives are a set of forward rates. Each forward rate is modeled by a lognormal process, i.e. a Black model. Thus the LIBOR market model may be interpreted as a collection of Black-models considered under a common pricing measure.

Literature

Original Articles

• Alan Brace, Dariusz Gatarek, Marek Musiela: The Market Model of Interest Rate Dynamics. Mathematical Finance 7, page 127. Blackwell 1997.
• Kristian R. Miltersen, Klaus Sandmann, Dieter Sondermann: Closed Form Solutions for Term Structure Derivatives with Lognormal Interest Rates. Journal of Finance 52, 409-430. 1997.

Books

• Damiano Brigo, Fabio Mercurio: Interest Rate Models - Theory and Practice. Springer, Berlin, 2001. ISBN 3540417729.
• Christian P. Fries: Mathematical Finance: Theory, Modeling, Implementation. Frankfurt 2006. 400 Pages, PDF File, Creative Commons Lizenz
• Marek Musiela, Marek Rutkowski: Martingale methods in financial modelling: theory and applications. Springer, 1997. ISBN 354061477X.
• Riccardo Rebonato: Modern Pricing of Interest-Rate Derivatives: The Libor Market Model and Beyond. Princeton University Press, 2002. ISBN 0691089736.

Weblinks

Java applets for pricing under a LIBOR market model and Monte-Carlo methods