This paper considers extensions of the Libor market model (Brace et al (1997), Jamshidian (1997), Miltersen et al (1997)) to markets with volatility skews in observable option prices. We expand the family of forward rate processes to include diffusions with non-linear forward rate dependence and...

The classical quot;no-arbitragequot; argument assumption is based on perfect replication of instruments. In fixed-income markets there are many instruments for which replication is costly and/or time-consuming. This work is based on a modeling approach where finite times are needed to perform...

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...

This article shows how a modeling framework for the evolution of credit spreads can be built up starting from a simple representation with only two states - default and no default. The model is generalized by introducing credit classes, with transitions from one class to another driven by a...

This paper examines the behaviour of foreign exchange reserves, when a government defends an exchange rate target zone using Minimal Marginal Intervention. Reserve depletion defending a single exchange rate barrier is first modelled as the maximum or minimum value of the path of an unregulated...

This paper provides a short introduction to the topic of target zone exchange rate option pricing. Models covered include: Black-Scholes equation with derivation, European Call on a stock option, Garman-Kohlhagen model for an option on a free-floating exchange rate, Dumas Jennergren and Naslund...

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...

This paper characterizes the arbitrage-free dynamics of interest rates, in the presence of both jumps and diffusion, when the term structure is modeled through simple forward rates (i.e., through discretely compounded forward rates evolving continuously in time) or forward swap rates. Whereas...

We introduce a new class of flexible and tractable matrix affine jump-diffusions (AJD) to model multivariate sources of financial risk. We first provide a complete transform analysis of this model class, which opens a range of new potential applications to, e.g., multivariate option pricing with...

Using a large data set on credit default swaps, we study how default risk interacts with interest-rate risk and liquidity risk to jointly determine the term structure of credit spreads. We classify the reference companies into two broad industry sectors, two broad credit rating classes, and two...