Abstract
This paper discusses the correlation structure between London Interbank Offered Rates (LIBOR) by using the copula function. We start from one simplified model of A. Brace, D. Gatarek, and M. Musiela (1997) and find out that the copula function between two LIBOR rates can be expressed as a sum of an infinite series, where the main term is a distribution function with Gaussian copula. Partial differential equation method is used for deriving the copula expansion. Numerical results show that the copula of the LIBOR rates and Gaussian copula are very close in the central region and differ in the tail, and the Gaussian copula approximation to the copula function between the LIBOR rates provides satisfying results in the normal situation.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
