We compare single factor Markov-functional and multi factor market models for hedging performance of Bermudan swaptions. We show that hedging performance of both models is comparable, thereby supporting the claim that Bermudan swaptions can be adequately risk-managed with single factor models....

We address two empirical issues related to the long end of the yield curve based on euro swap rates. First, for maturities longer than 20 years we find evidence for an `excess' downward slope that cannot be explained by convexity. Second, volatility at the very long end of the yield curve is...

In this paper we empirically analyze and compare the Libor and Swap Market Models, developed by Brace, Gatarek and Musiela (1997) and Jamshidian (1997), using panel data on prices of US caplets and swaptions. A Libor Market Model can directly be calibrated to observed prices of caplets, whereas...

We introduce a general class of interest rate models in which the value of pure discount bonds can be expressed as a functional of some (low-dimensional) Markov process. At the abstract level this class includes all current models of practical importance. By specifying these models in...

We introduce a general class of interest rate models in which the value of pure discount bonds can be expressed as a functional of some (low-dimensional) Markov process. At the abstract level this class includes all current models of practical importance. By specifying these models in...

In this paper we address the pricing of double barrier options. To derive the density function of the first-hit times of the barriers, we analytically invert the Laplace transform by contour integration. With these barrier densities, we derive pricing formulae for new types of barrier options:...

In this paper we show that contrary to the claim made in Longstaff, Santa-Clara, and Schwartz (2000a) and Longstaff, Santa-Clara, and Schwartz (2000b) discrete string models are not more parsimonious than market models. In fact, they are found to be observationally equivalent. We derived that...

In this paper we show that discrete string models are observationally equivalent to market models. Furthermore, the parsimony of the models is investigated and determined. As a consequence of the observational equivalence we show that discrete string models are a special case of the HJM...

We empirically compare Libor and Swap Market Models for the pricing of interest rate derivatives, using panel data on prices of US caplets and swaptions. A Libor Market Model can directly be calibrated to observed prices of caplets, whereas a Swap Market Model is calibrated to a certain set of...

Cap and swaption prices contain information on interest rate volatilities and correlations. In this paper, we examine whether this information in cap and swaption prices is consistent with realized movements of the interest rate term structure. To extract an option-implied interest rate...