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A Comparison of Control Variate Methods for Pricing Interest Rate Derivatives in the LIBOR Market Model

Author

Listed:
  • Xu Chenglong

    (Department of Mathematics, Tongji University, Shanghai200092, China)

  • Guan Wei

    (Shanghai Pudong Development Bank Shanghai Branch, Shanghai200120, China)

  • Liang Yijuan

    (College of Economics and Management, Southwest University, Chongqing400715, China)

Abstract

This paper studies the control variate method for pricing interest rate derivatives driven by the LIBOR market model. Several control variates are constructed based on distinctive approximations for the LIBOR market model. Numerical results show the great efficiency of our methods. The idea in this paper can also be extended to price other interest rate derivatives under the LIBOR market model, such as Swaptions, Caps, some path dependent interest rate derivatives, and so forth.

Suggested Citation

  • Xu Chenglong & Guan Wei & Liang Yijuan, 2015. "A Comparison of Control Variate Methods for Pricing Interest Rate Derivatives in the LIBOR Market Model," Journal of Systems Science and Information, De Gruyter, vol. 3(1), pages 48-58, February.
    • Handle: RePEc:bpj:jossai:v:3:y:2015:i:1:p:48-58:n:5
    DOI: 10.1515/JSSI-2015-0048
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    References listed on IDEAS

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    1. de Jong, F.C.J.M. & Driessen, J.J.A.G. & Pelsser, A., 2000. "Libor and Swap Market Models for the Pricing of Interest Rate Derivatives : An Empirical Analysis," Discussion Paper 2000-35, Tilburg University, Center for Economic Research.
    2. Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. "Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
    3. Antonis Papapantoleon & David Skovmand, 2010. "Picard Approximation of Stochastic Differential Equations and Application to Libor Models," CREATES Research Papers 2010-40, Department of Economics and Business Economics, Aarhus University.
    4. Mark Joshi & Alan Stacey, 2008. "New and robust drift approximations for the LIBOR market model," Quantitative Finance, Taylor & Francis Journals, vol. 8(4), pages 427-434.
    5. Antonis Papapantoleon & Maria Siopacha, 2009. "Strong Taylor approximation of stochastic differential equations and application to the L\'evy LIBOR model," Papers 0906.5581, arXiv.org, revised Oct 2010.
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