LIBOR MARKET MODEL UNDER THE REAL-WORLD MEASURE

This paper consists of two parts. The first part aims to construct a LIBOR market model under the real-world measure (LMRW) according to the Jamshidian framework. Then, LIBOR rates, bond prices and a state price deflator are explicitly described under the LMRW. The second part aims to estimate the market price of risk, as well as to investigate the fundamental properties of real-world simulations. Then, the following subjects are theoretically investigated: (1) a method for determining the number of factors for real-world simulations, (2) the properties of real-world simulations, and (3) the value of the market price of risk in connection with sample data. Numerical examples demonstrate our results.