LIBOR Market Model

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The LIBOR Market Model, also referred to as the BGM model, is an interest rate model used for the pricing of interest rate derivatives, especially complex derivatives such as exotics. The model primitives are a set of LIBOR forward rates, which have the advantage of being directly observable in the market. 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.

Contents

  • 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.

  • Dariusz Gatarek, Przemyslaw Bachert, Robert Maksymiuk: The LIBOR Market Model in Practice. John Wiley & Sons, 2007. ISBN 0-470-01443-1.
  • Damiano Brigo, Fabio Mercurio: Interest Rate Models - Theory and Practice. Springer, Berlin, 2001. ISBN 3-540-41772-9.
  • Christian P. Fries: Mathematical Finance: Theory, Modeling, Implementation. Frankfurt 2006. 400 Pages, PDF File, Creative Commons License
  • Marek Musiela, Marek Rutkowski: Martingale methods in financial modelling: theory and applications. Springer, 1997. ISBN 3-540-61477-X.
  • Riccardo Rebonato: Modern Pricing of Interest-Rate Derivatives: The Libor Market Model and Beyond. Princeton University Press, 2002. ISBN 0-691-08973-6.
  • John Schoenmakers: Robust Libor Modelling and Pricing of Derivative Products. Chapman & Hall, 2004. ISBN 1-584-88441-X.


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