Libor replacement II: completing the generalised forward market model
The FMM is upgraded to model the full term structure, pricing all possible bonds and the bank account
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In this paper, Andrei Lyashenko and Fabio Mercurio show that the generalised forward market model (FMM) they previously introduced can be effectively extended to make it a complete term-structure model describing the evolution of all possible bond prices as well as of the bank account, which is needed to compute backward-looking term rates. The FMM extension results in a model that is effectively a hybrid between a Libor market model and a Markovian Heath-Jarrow
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