This paper presents a critical review of the different versions of the LIBOR market model (LMM). Based on the new taxonomy of the term structure models (see Nawalkha, Beliaeva, and Soto [2007a, 2007b]) the typical application of the LMM are shown to triple-plus type, exposing these to the...

We derive expected bond return equations for various structural credit valuation models with alternative stochastic processes and boundary conditions for default given in Merton [1974], Merton [1976], Black and Cox [1976], Heston [1993], Longstaff and Schwartz [1995], and Collin-Dufresne and...

Does the selection of a specific interest rate model to use for pricing, hedging, and risk-return analysis depend upon whether the user is a buy-side institution or a sell-side dealer bank? Sanjay Nawalkha and Riccardo Rebonato debate this question in this paper and provide some insightful...

Two-market anomalies since the 2008 global financial crisis – the widespread failure of covered interest parity (CIP) in foreign exchange swaps and negative 30-year US dollar interest rate swap-Treasury spreads have been challenging for conventional asset pricing models. Using a three-factor...

This paper presents a benchmarking model for validation of default probabilities of listed companies for Basel II purposes. The model is based on the recent studies on the predictive capability of structural credit risk models. Benchmark ratings and one-year default probabilities are assigned to...

Using interest rate derivative market prices, this paper derives the term structure of the LIBOR-overnight index swap (OIS) spread, which is considered as the funding liquidity risk premium, following the Cox–Ingersoll–Ross model. The probability density functions of the LIBOR-OIS spread...

This paper studies the discriminatory power and calibration quality of the structural credit risk models under the 'exogenous default boundary' approach including those proposed by Longstaff and Schwartz (1995) and Collin-Dufresne and Goldstein (2001), and 'endogenous default boundary' approach...

Yield curve control (YCC) allows central banks to control long-term interest rates within a pre-announced trading band to complement traditional monetary policy. This note uses a target-zone model developed for exchange rates to study the bond yield movements under YCC. The bond yield is assumed...