This paper reviews the LIBOR market model (LMM) and the LMM-SABR model. While a plethora of interest rate models, such as fundamental models, single-plus models, double-plus models, and triple plus models, can be used for valuation of plain vanilla derivatives, only a few models such as the LMM...

This paper demonstrates how to value American interest rate options under the jump extended constant-elasticity-of-variance (CEV) models. We consider both exponential jumps (see Duffie, Pan, and Singleton (2000)) and lognormal jumps (see Johannes (2004)) in the short rate process. We show how to...

This paper gives a new taxonomy of dynamic term structure models that classifies all existing TSMs as either fundamental models or preference-free single-plus, double-plus, and triple-plus models. We exemplify the new taxonomy by considering preference-free versions of some well-known...

This paper generalizes the M-square and M-vector models (Fong and Fabozzi [1985] and Nawalkha and Chambers [1997]) by using a Taylor series expansion of the bond return function with respect to simple polynomial functions of the cash flow maturities. The classic M-vector computes the weighted...

This paper derives a multibeta representation theorem for pricing assets using arbitrary reference variables that are not necessarily the true factors. Under this theorem, the upper bound on pricing deviations depends upon the correlations not only between the reference variables and the factors...

Are the managers of financial institutions ready for the small but increasingly significant risk of inflation in the near future, due to the unprecedented fiscal and monetary responses of the U.S. government to prevent an economic collapse? This paper addresses this important issue by reviewing...

Does the selection of a specific interest rate model to use for pricing, hedging, and risk-return analysis depend upon whether the user is a buy-side institution or a sell-side dealer bank? Sanjay Nawalkha and Riccardo Rebonato debate this question in this paper and provide some insightful...

This paper derives formulas for higher order duration measures, including D(1) (i.e. Macaulay duration), D(2) (i.e., slope duration), D(3) (curvature duration), etc. We develop a general iterative method to obtain formulas for any higher order measure D(m), for an arbitrary positive integer...

Closed-form formulas for Macaulay duration, as given by Babcock and Chua, provide the user with a less cumbersome and more efficient procedure for calculating duration. Recent developments, however, have suggested alternative measures of bond portfolio immunization designed to overcome the...

This paper tests empirically whether convexity is return enhancing (the traditional view based upon parallel term structure shifts), or return diminishing (the equilibrium view suggesting convexity is priced). Results of empirical tests over different time periods show bond convexity to be...