Dependence structure between LIBOR rates by copula method

作者：Wu Yijun; Zheng Zhi; Zhou Shulin; Yang Jingping^*

来源：Frontiers of Mathematics in China, 2015, 10(1): 147-183.

DOI：10.1007/s11464-014-0315-4

• London Interbank Offered Rate (LIBOR)
• copula function
• partial differential equation (PDE)

This paper discusses the correlation structure between London Interbank Offered Rates (LIBOR) by using the copula function. We start from one simplified model of A. Brace, D. Gatarek, and M. Musiela (1997) and find out that the copula function between two LIBOR rates can be expressed as a sum of an infinite series, where the main term is a distribution function with Gaussian copula. Partial differential equation method is used for deriving the copula expansion. Numerical results show that the copula of the LIBOR rates and Gaussian copula are very close in the central region and differ in the tail, and the Gaussian copula approximation to the copula function between the LIBOR rates provides satisfying results in the normal situation.

• 出版日期2015-2
• 单位北京大学