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2002 | OriginalPaper | Chapter

Arbitrage-Free Interpolation in Models of Market Observable Interest Rates

Author : Erik Schlögl

Published in: Advances in Finance and Stochastics

Publisher: Springer Berlin Heidelberg

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Models which postulate lognormal dynamics for interest rates which are compounded according to market conventions, such as forward LIBOR or forward swap rates, can be constructed initially in a discrete tenor framework. Interpolating interest rates between maturities in the discrete tenor structure is equivalent to extending the model to continuous tenor. The present paper sets forth an alternative way of performing this extension; one which preserves the Markovian properties of the discrete tenor models and guarantees the positivity of all interpolated rates.

Metadata
Title
Arbitrage-Free Interpolation in Models of Market Observable Interest Rates
Author
Erik Schlögl
Copyright Year
2002
Publisher
Springer Berlin Heidelberg
DOI
https://doi.org/10.1007/978-3-662-04790-3_11