The affine LIBOR model

I will present a general and flexible approach to LIBOR modelling based on the class of affine factor processes. The approach respects the basic economic requirement that LIBOR rates are non-negative, and the basic requirement from mathematical finance that LIBOR rates are analytically tractable martingales with respect to their forward measure. Additionally, and most importantly, the approach leads to analytically tractable expressions of multi-LIBOR payoffs. The approach unifies therefore the advantages of well-known forward price models with those of classical LIBOR rate models. Several examples are outlined and prototypical volatility smiles are shown. In particular the CIR-process based affine LIBOR model might be of interest for applications, since closed form valuation formulas for caps and swaptions can be derived. The talk is based on joint work with Antonis Papapantoleon and Josef Teichmann.