6

38

 

Princeton University Press (Visit publisher website)

2002

English

 

 

 

Advanced

 

 

Credit risk, quantitative analysis, single-name credit derivatives, estimation, instantaneous volatility, covariance matrix, market completeness, decorrelation, instantaneous volatility functions, term structure of volatilities, term structure of the swaption matrix, humped instantaneous volatility functions, time dependence of instantaneous volatilities, analysis of different instantaneous volatility functions

 

6.1 Introduction and Motivation
6.2 Instantaneous Volatility Functions: General Results
6.3 Functional Forms for the Instantaneous Volatility Function – Financial Implications
6.4 Analysis of Specific Functional Forms for the Instantaneous Volatility Functions
6.5 Appendix I – Why Specification (6.11c) Fails to Satisfy Joint Conditions
6.6 Appendix II – Indefinite Integral of the Instantaneous Covariance

 

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*** From the publisher ***

In recent years, interest-rate modeling has developed rapidly in terms of both practice and theory. The academic and practitioners` communities, however, have not always communicated as productively as would have been desirable. As a result, their research programs have often developed with little constructive interference. In this book, Riccardo Rebonato draws on his academic and professional experience, straddling both sides of the divide to bring together and build on what theory and trading have to offer.

Rebonato presents the conceptual foundations for the application of the LIBOR market model to the pricing of interest-rate derivatives. He treats in great detail the calibration of this model to market prices, asking how possible and advisable it is to enforce a simultaneous fitting to several market observables. He does so with an eye to mathematical feasibility and financial justification, while devoting special scrutiny to the implications of market incompleteness.

Much of the book concerns an original extension of the LIBOR market model, devised to account for implied volatility smiles. This is done by introducing a stochastic-volatility, displaced-diffusion model. The emphasis again is on the financial justification and computational feasibility of the proposed solution to the smile problem. This book is must reading for quantitative researchers in financial houses, practitioners in the derivatives area, and students of finance.