Trivariate support of flat-volatility forward Libor rates

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Jamshidian, Farshid (2007) Trivariate support of flat-volatility forward Libor rates.

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Abstract:This paper investigates the multivariate support of forward Libor rates in the one-factor, constant volatilities Libor market model. The comparatively simple bivariate case was solved in Jamshidian [2] in connection to the recent finding by Davis and Mataix-Pastor [1] of positive probability of negative Libor rates in the swap market model. The approach here builds on [2] but becomes really effective only in the trivariate case, and there particularly for a special “flat-volatility” case, leading to an analytic solution. The main idea is a certain recursion in the Libor market model by means of which the calculation of the support is reduced to a calculus of variation problem (with bounds on the slope).
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Link to this item:http://purl.utwente.nl/publications/59850
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