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Hedging performance of the Libor market model: the cap market case

Author

Listed:
  • Sami Attaoui

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

This article investigates the hedging performance of the Libor Market Model (LMM) as well as the need to use models that explicitly incorporate Volatility Specific Factors (VSF) to better the hedging results. We compare the hedging performance of a standard LMM to that of a Constant Elasticity of Variance (CEV) LMM and find that, although the volatility risk is not completely removed by a hedge portfolio composed only of bonds, using a standard LMM is adequate to obtain high hedging performance in the cap market.

Suggested Citation

  • Sami Attaoui, 2011. "Hedging performance of the Libor market model: the cap market case," Post-Print hal-00653437, HAL.
    • Handle: RePEc:hal:journl:hal-00653437
    DOI: 10.1080/09603107.2011.568391
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    as
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