Generic market models

  • Pietersz R
  • Van Regenmortel M
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Currently, there are two market models for valuation and risk man- agement of interest rate derivatives, the LIBOR and swap market models. In this paper, we introduce arbitrage-free constant maturity swap (CMS) market mod- els 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 par- ticularly apt for pricing of Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps.

Author-supplied keywords

  • BGM model
  • CMS
  • Drift terms
  • Generic market model

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  • Raoul Pietersz

  • Marcel Van Regenmortel

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