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Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks

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  • Lin, Shih-Kuei
  • Wang, Shin-Yun
  • Chen, Carl R.
  • Xu, Lian-Wen

Abstract

This research derives the LIBOR market model with jump risks, assuming that interest rates follow a continuous time path and tend to jump in response to sudden economic shocks. We then use the LIBOR model with jump risk to price a Range Accrual Interest Rate Swap (RAIRS). Given that the multiple jump processes are independent, we employ numerical analysis to further demonstrate the influence of jump size, jump volatility, and jump frequency on the pricing of RAIRS. Our results show a negative relation between jump size, jump frequency, and the swap rate of RAIRS, but a positive relation between jump volatility and the swap rate of RAIRS.

Suggested Citation

  • Lin, Shih-Kuei & Wang, Shin-Yun & Chen, Carl R. & Xu, Lian-Wen, 2017. "Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 359-373.
    • Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:359-373
    DOI: 10.1016/j.najef.2017.07.018
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    Cited by:

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    3. Allan Jonathan da Silva & Jack Baczynski, 2024. "Discretely Distributed Scheduled Jumps and Interest Rate Derivatives: Pricing in the Context of Central Bank Actions," Economies, MDPI, vol. 12(3), pages 1-29, March.
    4. Li, Shaoyu & Huang, Henry H. & Zhang, Teng, 2020. "Generalized affine transform on pricing quanto range accrual note," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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