The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the `natural'' hedging instruments are particularly robust. This is true for all models that imply...

This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process and within the Markovian HJM framework developed in Chiarella amp; Nikitopoulos (2003). Closed form solutions for the price of a bond...

The defaultable forward rate is modeled as a jump diffusion process within the Schonbucher (2000, 2003) general Heath, Jarrow and Morton (1992) framework where jumps in the defaultable term structure cause jumps and defaults to the defaultable bond prices. Within this framework, we investigate...

One of the key features differentiating methods of calibrating the lognormal LIBOR Market Model (LMM) to observed at-the-money option prices is the way in which these methods handle correlation between forward rates of different maturities. On the basis of the Pedersen (1998) calibration...

This paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type quot;square rootquot; diffusions with piecewise constant parameters. The model is fitted to initial term structures given by a finite number...

The Market Models of the term structure of interest rates, in which forward LIBOR or forward swap rates are modelled to be lognormal under the forward probability measure of the corresponding maturity, are extended to a multicurrency setting. If lognormal dynamics are assumed for forward LIBOR...

The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the quot;naturalquot; hedging instruments are particularly robust. This is true for all models the imply...

The present paper analyses a broad range of one- and multifactor models of the term structure of interest rates. We assess the influence of the number of factors, mean reversion, and the factor probability distributions on the term structure shapes the models generate, and use spread options as...

As more and more jurisdictions transition from LIBOR-type interest rate benchmarks to new riskfree rate (RFR) benchmarks based on overnight rates, such as SOFR in the US, it is important to adapt interest rate term structure models to reflect this. In particular, overnight rates are largely...

As interest rate benchmarks move from LIBOR to overnight Risk-Free Rates (RFR), it has become increasingly important for models to accurately capture the interest rate dynamics at the overnight tenor. Overnight rates closely track central bank policy rate decisions resulting, in highly...