Lognormal random field approximations to LIBOR market models
- Kurbanmuradov, Orazgeldy
- Sabelfeld, Karl
- Schoenmakers, John G. M.
2010 Mathematics Subject Classification
- 60H10 65C05 90A09
- LIBOR interest rate models, random field simulation, Monte Carlo simulation of stochastic differential equations
We study several approximations for the LIBOR market models presented in Brace, Gatarek, Musiela (1997), Jamshidian (1997) and Schoenmakers, Coffey (1999). Special attention is payed to log-normal approximations and their simulation by using direct simulation methods for log-normal random fields. In contrast to the conventional numerical solution of SDE's this approach simulates the solution directly at the desired point and is therefore much more efficient. We carry out a path-wise comparison of the approximations and give applications to the valuation of the swaption and the trigger swap.
- Journal of Computational Finance, Vol. 6, No. 1, (69-100) 2002. Under new title: Lognormal approximations to Libor market models.