Libor Market Model: Market Consistent Calibration Methodology
Document ID: 2009-1348
Published on: 8th May 2009
Author: Steven Morrison, David Redfern & David Antonio
This note describes a proposed methodology for implementation and calibration of the Libor Market Model to market swaption prices. This methodology is intended to replace previous methodology as described in Technical Note 2004-31, “Libor Market Model: Implementation and Calibration”. The proposed methodology extends previous Barrie & Hibbert implementations to include time-dependence in forward-rate volatilities thus allowing a closer fit to market swaption prices. We also propose separating out volatility and correlation components of the model, with forward-rate volatilities being chosen to best fit market swaption prices and forward-rate correlations chosen to reflect real-world targets.
