Multicurve LIBOR market models and drift-free simulation

ABSTRACT

Some recent versions of Libor Market Model pay special attention to capturing the basis between different compounding frequencies by using multiple estimation curves jointly with a reference discount one. After reviewing three existing multicurve models in the literature, we propose a fourth one providing several advantages. In practice, the implementation of these models requires a discretization procedure that maintains the properties of the different stochastic dynamics involved in the model. Here, we propose a drift-free simulation technique that guarantees those properties for the four models.

Keywords:

• Libor Market Model
• drift-free simulation
• martingale property
• multicurveenvironment

2010 AMS Subject Classifications:

• 91G30
• 91G60
• 60H10
• 60H35

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work has been mainly supported by Spanish MCINN (Project MTM2010–21135–C02–01) and Xunta de Galicia (Grant GRC2014/044 cofunded with FEDER funds).