Interest Rate Models - Theory and Practice: With Smile, Inflation and Credit

by Damiano Brigo, Fabio Mercurio

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 a new chapter. 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 a new chapter. 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.

Genres: Finance, Textbooks, Economics, Mathematics, Reference, Nonfiction

1038 pages, Hardcover

First published January 1, 2006

Reviews

[Joe Malicki · Rating 5 out of 5]

Motivates risk neutral valuation really well, and explains what it's all about by considering it rigorously in context, in a way I haven't found anywhere else.

Also, it's a generally good book on its subject matter, but it's worth a look purely for the motivated take on risk neutral valuation.

[Paul · Rating 5 out of 5]

Well, I've started to write this review and I'm catching myself thinking: am I being obnoxious? I mean, this is Brigo-Mercurio, it's such a classic that even after Agatha Christie and George R. R. Martin are forgotten, if there are still quants left in the world, Brigo-Mercurio will still be read and cherished. If you want to know about interest rates, if you want to know about bonds, you practically have to read this book. I know it's a bit unfair, because to read it you have to have superior maths, but it's worth brushing up on your stochastic calculus for the sake of reading this book. The authors certainly know what they are talking about, along with the other ten people in the world who understand the subject at this level of depth.

[Daniel · Rating 5 out of 5]

Somewhat deceptive title. A great all-rounder for practical aspects of pricing diverse range of derivatives.

[Jeremy Lo · Rating 5 out of 5]

Very comprehensive textbook on interest rate derivatives. Perfect balance between mathematical rigour, precision, practicalities and readability. Excellent read for a wide range of audience (from students to experienced industry practitioners).