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Interest Rate Modeling with Risk-Free Rates After IBOR

Article Quant Q&A · Author: Jan Stuller
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Summary

The document asks for current interest-rate modeling references that address the cessation of IBOR benchmarks, noting that established texts may predate the transition. The answer does not recommend a textbook; instead, it points to the generalized Forward Market Model as a framework extending the LIBOR Market Model to include risk-free rates that replaced IBOR rates.

It also notes that subsequent research has developed the model further, including work on numerical partial differential equation methods. The exchange provides a direction for further study rather than a tutorial, derivation, comparison of models, or evidence about pricing performance. Readers should therefore treat it as a pointer to research literature, not a complete guide to post-IBOR derivatives modeling or market conventions.

Key ideas

  • The generalized Forward Market Model extends the LIBOR Market Model to incorporate replacement risk-free rates.
  • The document identifies research papers as the suggested route for learning about the model.
  • Later work has explored numerical PDE methods for this framework.
  • The answer offers research pointers rather than a textbook recommendation or a full modeling explanation.

Tags

Fixed incomeDerivatives pricingStatistics
Full text
# Interest Rates Modelling post IBOR cessation


# Interest Rates Modelling post IBOR cessation












There are many excellent and well known books on interest rates modelling, the ones that come to mind are for example:

- The SABR/LIBOR Market Model (Rebonato, 2011)

- Interest Rate Modeling (Vol 1, 2 & 3, Piterbarg, 2010)

- Pricing and Trading Interest Rate Derivatives (Darbyshire, 2022)

- Modern Pricing of Interest-Rate Derivatives (Rebonato, 2012)

To list just a few.

However, to my knowledge, none of these have been updated to take account of the recent IBOR cessation. Whist the fundamentals of the modelling still hold, of course, it would be nice to have a text book which is up to date with the latest market standards.

Would anyone be able to recommend a textbook which has taken IBOR cessation specifically into account?

## Answer by arjacy (score 1)

https://quant.stackexchange.com/a/82040

This answer does not include any textbooks, but you might be interested in the generalized Forward Market Model which was introduced by Lyashenko and Mercurio. It extends the LIBOR Market Model and includes risk free rates which have replaced the IBOR rates. The authors' two papers are located here and here. Other papers have since been written which do further research on this model; for example numerical PDE methods are studied in this paper.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.