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Market model of interest rates
       
 
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Market model of interest rates

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Market model of interest rates
A special case of the Heath-Jarrow-Morton model due to Brace, Gatarek and Musiela in which the term structure of Interest rates is modelled in terms of simple Libor rates (which are lognormally distributed with respect to Forward measure) rather than instantaneous Forward rates. This allows the modeller to exclude the possibility of negative Interest rates from the model and obtain prices for caps, floors and swaptions consistent with the Black-Scholes framework. The model can be calibrated using readily available market data: Forward or Swap rates volatilities and correlations, and is particularly suited to path-dependent instruments.
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