Generic market models

Abstract. Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. We introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. The generic market model is particularly apt for pricing of Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps. Key words: generic market model, drift terms, BGM model, CMS JEL Classification: G13 Mathematics Subject Classification (2000): 91B28, 60H30, 60G44

• Type: Journal
• Year: 2006
• Where: FS
• Authors: Raoul Pietersz, Marcel van Regenmortel
• Keywords: FS 2006, Generic Market Model, Market Model, Swaps