Interest Rate Models — Theory and Practice

With Smile, Inflation and Credit

  • Damiano Brigo
  • Fabio Mercurio

Part of the Springer Finance book series (FINANCE)

Table of contents

  1. Front Matter
    Pages I-LIV
  2. Basic Definitions and No Arbitrage

    1. Front Matter
      Pages LV-LV
  3. From Short Rate Models to HJM

    1. Front Matter
      Pages 49-49
  4. Market Models

  5. The Volatility Smile

    1. Front Matter
      Pages 445-445
    2. Pages 453-494
  6. Examples of Market Payoffs

  7. Inflation

  8. Credit

    1. Front Matter
      Pages 693-693
    2. Pages 757-839
  9. Back Matter
    Pages 875-981

About this book


The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced.

The old sections devoted to the smile issue in the LIBOR market model have been enlarged into several new chapters. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. 

The fast-growing interest for hybrid products has led to new chapters. A special focus here is devoted to the pricing of inflation-linked derivatives. 

The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.


Interest rates JEL classification: G12, G13, E43 Stochastic calculus calculus calibration modeling pricing

Authors and affiliations

  • Damiano Brigo
    • 1
    • 2
  • Fabio Mercurio
    • 1
  1. 1.San Paolo-IMI GroupBanca IMIMilanoItaly
  2. 2.Bocconi UniversityMilanoItaly

Bibliographic information