Arbitrage-Free Interpolation in Models of Market Observable Interest Rates

  • Erik Schlögl


Models which postulate lognormal dynamics for interest rates which are compounded according to market conventions, such as forward LIBOR or forward swap rates, can be constructed initially in a discrete tenor framework. Interpolating interest rates between maturities in the discrete tenor structure is equivalent to extending the model to continuous tenor. The present paper sets forth an alternative way of performing this extension; one which preserves the Markovian properties of the discrete tenor models and guarantees the positivity of all interpolated rates.


Interest Rate Term Structure Forward Rate Martingale Measure Short Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2002

Authors and Affiliations

  • Erik Schlögl
    • 1
  1. 1.University of TechnologySydneyAustralia

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