Smooth calibration of Markov functional models for pricing exotic interest rate derivatives

The Libor market model is widely used but often criticised for its slowness. Nick Denson and Mark Joshi develop an accurate and stable calibration procedure that allows for the effective use of a control variate

The Libor market model (LMM) is commonly used for pricing exotic interest rate derivatives. However, its popularity is limited by the fact that its high-dimensionality necessitates (quasi)-Monte Carlo simulation for pricing. Such simulation is often criticised because of its low convergence rate and the difficulties of pricing early-exercisable derivatives.

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Smooth calibration of Markov functional models for pricing

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