back to Damiano Brigo’s professional page. Interest Rate Models: Theory and Practice – With Smile, Inflation and Credit. (, 2nd Ed. ) by Damiano Brigo. Interest Rate Models – Theory and Practice: With Smile, Inflation and Credit. Front Cover · Damiano Brigo, Fabio Mercurio. Springer Science. The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably.
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From one side, the authors would like to help quantitative analysts and advanced traders handle interest-rate derivatives with a sound theoretical apparatus. Examples are given illustrating that not all can be, but the Flesaker-Hughston model is interesting also in that it does not depend on possibly highly complex systems of stochastic differential equations for interest rate processes. I really enjoyed the experience having him as my Professor.
A special focus here is devoted to the pricing of inflation-linked derivatives.
For those who have a sufficiently strong mathematical background, this book is a must. The 2nd edition of this successful book has several new features. The book is written very well, with brig steps for the most part included in detail. Physicists who aspire to become financial engineers may find the discussion on the change of numeraire to be similar to the “change in gauge” in quantum field theory.
The time evolution of the riskless bond is merely exponential, as expected, but that of the risky security is integest according to a geometric Brownian motion.
Interest Rate Models Theory and Practice
This simultaneous attention to theory and practice is difficult to find in other available literature. A special focus here is devoted to the pricing of inflation-linked derivatives. One model that particularly stands out in this regard is due to B.
Instead default is modeled by an exogenous jump stochastic process.
In particular, they show that the probability to default after a given time, i. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption -volatility interpolation technique has been introduced.
The fast-growing interest for hybrid products has led to a new chapter. Sample text from the book prefacefeaturing a description by chapter. One of these, the Cox-Ingersoll-Ross CIR model, is analytically tractable and preserves the positivity of the instantaneous short rate. Leia mais Leia menos. International Statistical Institute short book reviews. Examples of calibrations to real market data are now considered.
It is true that every month a new book on financial modeling or on mathematical finance comes out, but interedt is a good one.
Interest-Rate Models: Theory and Practice – Research Portal, King’s College, London
Not really, but the authors do explain how the correlation can be ignored, since it has little impact on credit default swaps. All changes in the value of the portfolio can be shown to be entirely due to capital gains, with none resulting from the withdrawal or infusion of cash. Detailed examples are given which illustrate how to use reduced form models and market quotes to estimate default probabilities.
Fabozzi Series Book English Edition. Readers interested in counterparty risk will be exposed to an interesting assertion, anf that the value of a generic claim that has counterparty risk is always less than the value midels a similar claim whose counterparty has a probability of default equal to mosels.
Ample space in the book is devoted to a discussion of this model, which is essentially one where one adds a “square root” to the diffusion coefficient.
Interestingly, the authors devote a part of the book to the connection between interest rate models and credit derivatives, wherein they argue that credit derivatives are not only interesting in and of themselves, but that the tools used to model interest rate swaps can be applied to credit default swaps to a large degree.
This filtration can be viewed as essentially a collection of events that occur or not depending on the history of the stock price. Techniques of variance reduction in Monte Carlo simulation are well-known, and the authors discuss one of these, the control variate technique.
It perfectly combines mathematical depth, historical perspective and practical relevance. The three final new chapters of this second edition are devoted to credit.
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The authors unfortunately do not include a discussion on how to calibrate this model to market data, but instead delegate it to the references.
Advanced modele students, graduate students and researchers should benefit as ratee from seeing how some sophisticated mathematics can be used in concrete financial problems. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs.
The authors give a brief overview of structural models, emphasizing their similarities to barrier-free option models, gate do not treat them in detail in the book, since they do not have any analogues to interest rate models.