Calibration accuracy of three variants of the Libor Market Model
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Compared with traditional mortality models, machine learning algorithms can significantly improve the forecasts of future mortality rates.
There is an increasing complexity of risk neutral valuation models in the insurance industry, along with a growing regulatory attention on them. In particular, regulators require the interest rate model to replicate observed market prices, a key driver of model complexity, especially in terms of number of parameters involved. To highlight the benefits of one particular model, we cover the following topics:
- Analysis of market conditions for the three dates of interest
- Overview of the three variants of the Libor market model
- Comparison of the market consistent property of the three models
- Refinement of the model with constant elasticity volatility
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Calibration accuracy of three variants of the Libor Market Model
We highlight a Libor market model with constant elastic volatility, showing an interesting trade-off between parameters used and quality of results.