Change search
ReferencesLink to record
Permanent link

Direct link
Multifactor Interest Rate Models in Low-Rate Environments
Norwegian University of Science and Technology, Faculty of Natural Sciences and Technology, Department of Physics.
2013 (English)MasteroppgaveStudent thesis
Abstract [en]

This thesis studies a multi-factor Heath-Jarrow-Morton model and a LIBOR mar- ket model on the Norwegian, European and US interest rate market. The main concerns are the low-rate environment and exposure to negative interest rates in these models. We begin by introducing financial markets and the mathematical models explaining them. Further we discuss the problem with the current low-rate environment and the historical market practice. The focuses are implementations of two multi-factor interest rate models and the presence of negative interest rates. The historical data is provided by DNB and consists of zero coupon swap rates for several maturities in the period 2000-2012. The volatility factors are derived from historical data using principal component analysis and covariance matrices. With today?s yield curve the probability of negative rates is highly significant in the HJM model, whereas it is zero in LMM because of lognormality. Monte Carlo is used on the models to compare prices of caps and floors. We show that the models do not produce the same price especially around strikes near the current 3-month rates. Further we price long butterfly spreads to show the absence of arbitrage in both models.

Place, publisher, year, edition, pages
Institutt for matematiske fag , 2013. , 59 p.
URN: urn:nbn:no:ntnu:diva-22624Local ID: ntnudaim:10031OAI: diva2:650400
Available from: 2013-09-20 Created: 2013-09-20 Last updated: 2013-09-20Bibliographically approved

Open Access in DiVA

fulltext(1569 kB)2030 downloads
File information
File name FULLTEXT01.pdfFile size 1569 kBChecksum SHA-512
Type fulltextMimetype application/pdf
cover(184 kB)21 downloads
File information
File name COVER01.pdfFile size 184 kBChecksum SHA-512
Type coverMimetype application/pdf

By organisation
Department of Physics

Search outside of DiVA

GoogleGoogle Scholar
Total: 2030 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

Total: 1319 hits
ReferencesLink to record
Permanent link

Direct link