Regression modelMarket Models
Libor Market Model
The LIBOR Market Model (BGM), developed by Brace, Gatarek, and Musiela (1997), is a multi-factor interest rate model that directly models forward LIBOR rates as lognormal processes. Unlike short-rate models, LMM naturally prices caplets at the market level and is the industry standard for valuing caps, floors, and exotic interest rate derivatives.
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Sources
- Brace, A., Gatarek, D., & Musiela, M. (1997). The market model of interest rate dynamics. Mathematical Finance, 7(2), 127-155. DOI: 10.1111/1467-9965.00028 ↗
- Jamshidian, F. (1997). LIBOR and swap market models and measures. Finance and Stochastics, 1(4), 293-330. DOI: 10.1007/s100300050019 ↗