Affine LIBOR models driven by real-valued affine processes

Wolfgang Müller*, Stefan Waldenberger

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


The class of affine LIBOR models is appealing since it satisfies three central requirements of interest rate modeling. It is arbitrage-free, interest rates are nonnegative, and caplet and swaption prices can be calculated analytically. In order to guarantee nonnegative interest rates affine LIBOR models are driven by nonnegative affine processes, a restriction that makes it hard to produce volatility smiles. We modify the affine LIBOR models in such a way that real-valued affine processes can be used without destroying the nonnegativity of interest rates. Numerical examples show that in this class of models, pronounced volatility smiles are possible.
Original languageEnglish
Pages (from-to)333-350
JournalStochastic Models
Issue number2
Publication statusPublished - 2016


Dive into the research topics of 'Affine LIBOR models driven by real-valued affine processes'. Together they form a unique fingerprint.

Cite this