Analysing Quantiles in Models of Forward Term Rates

McWalter, TA; Schlögl, E; van Appel, J

Analysing Quantiles in Models of Forward Term Rates

McWalter, TA Schlögl, E van Appel, J

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Publisher:: MDPI
Publication Type:: Journal Article
Citation:: Risks, 2023, 11, (2), pp. 29
Issue Date:: 2023-02-01

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Field	Value	Language
dc.contributor.author	McWalter, TA
dc.contributor.author	Schlögl, E
dc.contributor.author	van Appel, J
dc.date.accessioned	2023-05-30T00:05:42Z
dc.date.available	2023-05-30T00:05:42Z
dc.date.issued	2023-02-01
dc.identifier.citation	Risks, 2023, 11, (2), pp. 29
dc.identifier.issn	2227-9091
dc.identifier.issn	2227-9091
dc.identifier.uri	http://hdl.handle.net/10453/170534
dc.description.abstract	The class of forward-LIBOR market models can, under certain volatility structures, produce unrealistically high long-dated forward rates, particularly for maturities and tenors beyond the liquid market calibration instruments. This paper presents a diagnostic tool for analysing the quantiles of distributions for forward term rates in a displaced lognormal forward-LIBOR model (DLFM). In particular, we provide a quantile approximation that can be used to assess whether the modelled term rates remain within realistic bounds with a high probability. Applying this diagnostic tool (verified using Quasi-Monte Carlo (QMC) simulations), we show that realised forward term rates for long time horizons may be kept within realistic limits by appropriately damping the tail of the DLFM volatility function.
dc.language	en
dc.publisher	MDPI
dc.relation.ispartof	Risks
dc.relation.isbasedon	10.3390/risks11020029
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	1502 Banking, Finance and Investment, 1503 Business and Management
dc.title	Analysing Quantiles in Models of Forward Term Rates
dc.type	Journal Article
utslib.citation.volume	11
utslib.for	1502 Banking, Finance and Investment
utslib.for	1503 Business and Management
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
utslib.copyright.status	open_access	*
dc.date.updated	2023-05-30T00:05:40Z
pubs.issue	2
pubs.publication-status	Published
pubs.volume	11
utslib.citation.issue	2

Abstract:

The class of forward-LIBOR market models can, under certain volatility structures, produce unrealistically high long-dated forward rates, particularly for maturities and tenors beyond the liquid market calibration instruments. This paper presents a diagnostic tool for analysing the quantiles of distributions for forward term rates in a displaced lognormal forward-LIBOR model (DLFM). In particular, we provide a quantile approximation that can be used to assess whether the modelled term rates remain within realistic bounds with a high probability. Applying this diagnostic tool (verified using Quasi-Monte Carlo (QMC) simulations), we show that realised forward term rates for long time horizons may be kept within realistic limits by appropriately damping the tail of the DLFM volatility function.

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http://hdl.handle.net/10453/170534