An Empirical Comparison of Market Models

Abstract

The market models presented in Chapter 8 and the Markov-Functional models presented in Chapter 9 have obvious advantages for pricing exotic interest rate derivatives over the spot interest rate models presented in Part I of this book. It is therefore not surprising these models have received a lot of attention recently. These has been relatively little attention however for the empirical performance of these models. In this chapter we summarise some results from a recent study by De Jong, Driessen and Pelsser (1999) (DJDP hereafter) on the empirical performance of Libor market models (LMM) and swap market models (SMM). For a more detailed account, including a rigorous econometric analysis of the models, the interested reader is referred to the De Jong-Driessen-Pelsser paper.