Timeline for Intuition of drift in Libor market model
Current License: CC BY-SA 4.0
10 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| May 15 at 6:44 | vote | accept | Richi Wa | ||
| May 13 at 11:15 | comment | added | Richi Wa | Thank you! This helped a lot! | |
| May 13 at 11:00 | comment | added | Arshdeep | The third answer there provides intuition to the convexity adjustment, hopefully that should explain it. Numerator is just the covariance but because the rates are lognormal, it has the forward levels as well $dF=vol*F*dW$ | |
| May 13 at 10:58 | comment | added | Arshdeep | quant.stackexchange.com/questions/43085/… | |
| May 13 at 10:51 | comment | added | Richi Wa | Thanks, and how can I understand the numerator better? We systematically lose something proportional to $F_{k-1}*F_k$. If both rates are positive we always lose a bit (compared to the $P(k)$ bond, right?). Other question: is there any paper that discusses such intuition? Thanks! | |
| May 13 at 10:08 | comment | added | Arshdeep | F(k-1) sets at K-2 and is paid at K-1. That is its natural payment date. In measure Q-K, the relevant asset F(K-1) is valued as if paid at K. This is the payment delay adjustment - from K-1 to K. | |
| May 13 at 8:19 | comment | added | Richi Wa | Thank you for this answer. Could you please elaborate a bit more on the delayed aspect? The SDE holds for $t< T_{k-2}$, so I don't see a delay here. If we discount with $P_t(k)$ then we discount with a bond with longer maturity, I understand that. I would appreciate more thoughts on that. Thank you! | |
| May 12 at 21:26 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| May 12 at 20:26 | history | edited | Arshdeep | CC BY-SA 4.0 |
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| May 12 at 19:41 | history | answered | Arshdeep | CC BY-SA 4.0 |