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Asset Pricing in Discrete TimeA Complete Markets Approach$
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Ser-Huang Poon and Richard Stapleton

Print publication date: 2005

Print ISBN-13: 9780199271443

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199271445.001.0001

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BOND PRICING, INTEREST-RATE PROCESSES, AND THE LIBOR MARKET MODEL

BOND PRICING, INTEREST-RATE PROCESSES, AND THE LIBOR MARKET MODEL

Chapter:
(p.113) 7 BOND PRICING, INTEREST-RATE PROCESSES, AND THE LIBOR MARKET MODEL
Source:
Asset Pricing in Discrete Time
Author(s):

Ser-Huang Poon (Contributor Webpage)

Richard Stapleton (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199271445.003.0007

‘Bond Pricing, Interest-rate Processes, and the LIBOR Market Model’ uses the complete market, pricing kernel approach to value bonds, given stochastic interest rates. To value interest-rate derivatives, one important and practical problem is to model bond prices and interest rates with the correct drifts. The authors derive here the drift of the bond prices and interest rates under the period-by-period risk-neutral measure. As a special case, they derive the drift of the forward London Interbank Offer Rate (LIBOR) in what is generally known as the LIBOR Market Model.

Keywords:   Bond Pricing, drift of the bond prices, drift of the forward London Interbank Offer Rate (LIBOR), interest-rate derivatives, LIBOR Market Model, period-by-period risk-neutral measure, risk-neutral measure

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