• Media type: Text; E-Article
  • Title: Multiple stochastic volatility extension of the Libor market model and its implementation
  • Contributor: Belomestny, Denis [Author]; Mathew, Stanley [Author]; Schoenmakers, John G. M. [Author]
  • Published: Weierstrass Institute for Applied Analysis and Stochastics publication server, 2009
  • Language: English
  • ISSN: 0929-9629 -- 2056754-6 -- Monte Carlo Methods and Applications -- https://www.degruyter.com/journal/key/MCMA/html
  • Keywords: 60G51 ; 91G30 ; 60H10 ; 91G20 ; 60H05 ; 91G60 ; 62G20 ; Libor modeling -- stochastic volatility -- CIR processes -- calibration ; article
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  • Description: In this paper we propose an extension of the Libor market model with a highdimensional specially structured system of square root volatility processes, and give a road map for its calibration. As such the model is well suited for Monte Carlo simulation of derivative interest rate instruments. As a key issue, we require that the local covariance structure of the market model is preserved in the stochastic volatility extension. In a case study we demonstrate that the extended Libor model allows for stable calibration to the cap-strike matrix. The calibration algorithm is FFT based, so fast and easy to implement.
  • Access State: Open Access