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Home > Financial Information Sources > Financial Modeling > Interest Rate Models—Theory and Practice: With Smile, Inflation and Credit

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Interest Rate Models—Theory and Practice: With Smile, Inflation and Credit

Damiano Brigo, Fabio Mercurio
2nd Edition
Springer Finance Series
Berlin: Springer, 2006
981pp, ISBN: 978-3-540-22149-4
www.springer.com

This technical guide to interest rate modeling and derivatives combines theory and practice to provide the necessary mathematical expertise for quantitative analysts, advanced traders, and students. It analyzes the effectiveness of different models, and presents updates on hybrid products, credit derivatives, the smile issue in the LIBOR market model, calibrations to real market data, and stochastic volatility models.

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Interest Rate Models - Theory and Practice: With Smile, Inflation and Credit (Springer Finance)

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The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced.   The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered.   The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives.   The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.

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