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Linearized Hamiltonian of the LIBOR market model: analytical and empirical results

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Listed:
  • Pan Tang
  • Belal E. Baaquie
  • Xin Du
  • Ying Zhang

Abstract

The linearized Hamiltonian model is proposed to extend the London Interbank Offered Rate (LIBOR) Market Model (LMM). Firstly, we studied the Hamiltonian of LMM in the framework of quantum finance, and the nontrivial upper triangle form of LIBOR drift is derived. The linearized Hamiltonian is derived to improve the explanatory capability of the model for market data. Our approach uses one more parameter to explain the initial condition and the model can be used to calibrate LIBORs with extremely high accuracy. Furthermore, the market time index is required for applying the model to multi-LIBOR, and the results imply that the LIBOR future time lattice becomes shorter as one goes from near future to distant future.

Suggested Citation

  • Pan Tang & Belal E. Baaquie & Xin Du & Ying Zhang, 2016. "Linearized Hamiltonian of the LIBOR market model: analytical and empirical results," Applied Economics, Taylor & Francis Journals, vol. 48(10), pages 878-891, February.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:10:p:878-891
    DOI: 10.1080/00036846.2015.1090546
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    References listed on IDEAS

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