© 2001

Interest Rate Models Theory and Practice


Part of the Springer Finance book series (FINANCE)

Table of contents

  1. Front Matter
    Pages I-XXXV
  2. Models: Theory and Implementation

    1. Front Matter
    2. Damiano Brigo, Fabio Mercurio
      Pages 1-21
    3. Damiano Brigo, Fabio Mercurio
      Pages 23-42
    4. Damiano Brigo, Fabio Mercurio
      Pages 43-125
    5. Damiano Brigo, Fabio Mercurio
      Pages 127-171
    6. Damiano Brigo, Fabio Mercurio
      Pages 173-182
    7. Damiano Brigo, Fabio Mercurio
      Pages 183-282
    8. Damiano Brigo, Fabio Mercurio
      Pages 283-316
    9. Damiano Brigo, Fabio Mercurio
      Pages 317-368
    10. Damiano Brigo, Fabio Mercurio
      Pages 369-374
  3. Pricing Derivatives in Practice

    1. Front Matter
      Pages 375-375
    2. Damiano Brigo, Fabio Mercurio
      Pages 377-419
    3. Damiano Brigo, Fabio Mercurio
      Pages 421-451
    4. Damiano Brigo, Fabio Mercurio
      Pages 453-465
  4. Appendices

    1. Front Matter
      Pages 467-467
    2. Damiano Brigo, Fabio Mercurio
      Pages 469-484
    3. Damiano Brigo, Fabio Mercurio
      Pages 485-486
    4. Damiano Brigo, Fabio Mercurio
      Pages 487-492
    5. Damiano Brigo, Fabio Mercurio
      Pages 493-499

About this book


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 several new chapters. 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 new chapters. 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.


Interest rates JEL classification: G12, G13, E43 Stochastic Differential Equations Stochastic calculus arbitrage calculus derivatives differential equation dynamics inflation modeling stochastic differential equation swaps valuation volatility

Authors and affiliations

  1. 1.Banca IMISan Paolo IMI GroupMilanItaly

Bibliographic information

  • Book Title Interest Rate Models Theory and Practice
  • Authors Damiano Brigo
    Fabio Mercurio
  • Series Title Springer Finance
  • DOI
  • Copyright Information Springer-Verlag Berlin Heidelberg 2001
  • Publisher Name Springer, Berlin, Heidelberg
  • eBook Packages Springer Book Archive
  • Hardcover ISBN 978-3-540-41772-9
  • Softcover ISBN 978-3-662-04555-8
  • eBook ISBN 978-3-662-04553-4
  • Series ISSN 1616-0533
  • Series E-ISSN 2195-0687
  • Edition Number 1
  • Number of Pages XXXVII, 518
  • Number of Illustrations 34 b/w illustrations, 0 illustrations in colour
  • Topics Quantitative Finance
    Probability Theory and Stochastic Processes
  • Buy this book on publisher's site
Industry Sectors
Finance, Business & Banking


From the reviews:


"The text is no doubt my favorite on the subject of interest rate modeling. It perfectly combines mathematical depth, historical perspective and practical relevance. The fact that the authors combine a strong mathematical (finance) background with expert practice knowledge (they both work in a bank) contributes hugely to its format. I also admire the style of writing: at the same time concise and pedagogically fresh. The authors’ applied background allows for numerous comments on why certain models have (or have not) made it in practice. The theory is interwoven with detailed numerical examples…For those who have a sufficiently strong mathematical background, this book is a must."

From the reviews of the second edition:

"The book ‘Interest Rate Models – Theory and Practice’ provides a wide overview of interest rate modeling in mathematical depth. … The authors found a good approach to present a mathematically demanding area in a very clear, understandable way. The book will most likely become … one of the standard references in the area. … if one were to buy only one book about interest rate models, this would be it." (David Skovmand and Michael Verhofen, Financial Markets and Portfolio Management, Vol. 21 (1), 2007)

"This is the book on interest rate models and should proudly stand on the bookshelf of every quantitative finance practitioner and student involved with interest rate models. If you are looking for one reference on interest rate models then look no further as this text will provide you with excellent knowledge in theory and practice. … is simply a must for all. Especially, I would recommend this to students … . Overall, this is by far the best interest rate models book in the market." (Ita Cirovic Donev, MathDL, May, 2007)

"This is a very detailed course on interest rate models. Its main goal is to construct some kind of bridge between theory and practice in this field. From one side, the authors would like to help quantitative analysts and advanced traders handle interest-rate derivatives with a sound theoretical apparatus. … Advanced undergraduate students, graduate students and researchers should benefit from reading this book and seeing how some sophisticated mathematics can be used in concrete financial problems." (Yuliya S. Mishura, Zentralblatt MATH, Vol. 1109 (11), 2007)