Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa

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dc.contributor.advisorTaylor, Daviden_ZA
dc.contributor.authorMoodliyar, Leeneshen_ZA
dc.date.accessioned2016-07-14T12:20:55Z
dc.date.available2016-07-14T12:20:55Z
dc.date.issued2016en_ZA
dc.description.abstractThe popularity of the LIBOR Market Model (LMM) in interest rate modelling is a result of its consistency with market practice of pricing interest rate derivatives. In the context of a life insurance company, the LMM is calibrated to swaptions as they are actively traded for a wide variety of maturities and they serve as the natural hedge instruments for many of the long dated maturity products with embedded options. Before calibrating the model we extend the calibration process to address the issue of illiquidity in the South African swaption market. The swaption surface used in calibrating the model is generated with market implied quotes for the hedgeable component and thereafter using historical volatilities for the unhedgeable or illiquid component. Rebonato's 3 parameter correlation function proposed by Rebonato (2005) provides the best fit to historical data. We assume a general piecewise constant parameterisation for the instantaneous forward rate volatilities. These volatilities are then determined analytically using the Rectangular Cascade Calibration Algorithm from Brigo and Morini (2006). The calibration generates a stable volatility term structure with the instantaneous forward rate volatilities being positive and real. Through an extension of the calibration we are able to capture the benefits of a pure replication component and accommodate a large unhedgeable component in the price faced by life insurance companies in South Africa.en_ZA
dc.identifier.apacitationMoodliyar, L. (2016). <i>Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/20346en_ZA
dc.identifier.chicagocitationMoodliyar, Leenesh. <i>"Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016. http://hdl.handle.net/11427/20346en_ZA
dc.identifier.citationMoodliyar, L. 2016. Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Moodliyar, Leenesh AB - The popularity of the LIBOR Market Model (LMM) in interest rate modelling is a result of its consistency with market practice of pricing interest rate derivatives. In the context of a life insurance company, the LMM is calibrated to swaptions as they are actively traded for a wide variety of maturities and they serve as the natural hedge instruments for many of the long dated maturity products with embedded options. Before calibrating the model we extend the calibration process to address the issue of illiquidity in the South African swaption market. The swaption surface used in calibrating the model is generated with market implied quotes for the hedgeable component and thereafter using historical volatilities for the unhedgeable or illiquid component. Rebonato's 3 parameter correlation function proposed by Rebonato (2005) provides the best fit to historical data. We assume a general piecewise constant parameterisation for the instantaneous forward rate volatilities. These volatilities are then determined analytically using the Rectangular Cascade Calibration Algorithm from Brigo and Morini (2006). The calibration generates a stable volatility term structure with the instantaneous forward rate volatilities being positive and real. Through an extension of the calibration we are able to capture the benefits of a pure replication component and accommodate a large unhedgeable component in the price faced by life insurance companies in South Africa. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa TI - Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa UR - http://hdl.handle.net/11427/20346 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/20346
dc.identifier.vancouvercitationMoodliyar L. Calibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africa. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/20346en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleCalibrating the LIBOR market model to swaptions with an extension for illiquidity in South Africaen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMPhilen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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