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Real-World Scenarios With Negative Interest Rates Based on the LIBOR Market Model

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  • Sara Dutra Lopes
  • Carlos Vázquez

Abstract

In this article, we present a methodology to simulate the evolution of interest rates under real-world probability measure. More precisely, using the multidimensional Shifted Lognormal LIBOR market model and a specification of the market price of risk vector process, we explain how to perform simulations of the real-world forward rates in the future, using the Euler‒Maruyama scheme with a predictor‒corrector strategy. The proposed methodology allows for the presence of negative interest rates as currently observed in the markets.

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  • Sara Dutra Lopes & Carlos Vázquez, 2018. "Real-World Scenarios With Negative Interest Rates Based on the LIBOR Market Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(5-6), pages 466-482, November.
    • Handle: RePEc:taf:apmtfi:v:25:y:2018:i:5-6:p:466-482
    DOI: 10.1080/1350486X.2018.1492348
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    Cited by:

    1. Mohamed Ben Alaya & Ahmed Kebaier & Djibril Sarr, 2024. "Financial Stochastic Models Diffusion: From Risk-Neutral to Real-World Measure," Papers 2409.12783, arXiv.org.

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