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arXiv · 2109.10779

A mean-field extension of the LIBOR market model

Sascha Desmettre·Simon Hochgerner·Sanela Omerovic·Stefan Thonhauser
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Abstract

We introduce a mean-field extension of the LIBOR market model (LMM) which preserves the basic features of the original model. Among others, these features are the martingale property, a directly implementable calibration and an economically reasonable parametrization of the classical LMM. At the same time, the mean-field LIBOR market model (MF-LMM) is designed to reduce the probability of exploding scenarios, arising in particular in the market-consistent valuation of long-term guarantees. To this end, we prove existence and uniqueness of the corresponding MF-LMM and investigate its practical aspects, including a Black '76-type formula. Moreover, we present an extensive numerical analysis of the MF-LMM. The corresponding Monte Carlo method is based on a suitable interacting particle system which approximates the underlying mean-field equation.

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Sascha Desmettre, Simon Hochgerner, Sanela Omerovic, Stefan Thonhauser. 2021-09-22. A mean-field extension of the LIBOR market model. https://doi.org/10.1142/s0219024922500054

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