Dependence structure between LIBOR rates by copula method

doi:10.1007/s11464-014-0315-4

Front. Math. China

2015, Vol. 10

Issue (1) : 147-183 https://doi.org/10.1007/s11464-014-0315-4

RESEARCH ARTICLE

Dependence structure between LIBOR rates by copula method

Yijun WU¹,Zhi ZHENG²,Shulin ZHOU²,Jingping YANG^1,^*(

)

1. LMEQF, Department of Financial Mathematics, Center for Statistical Science, Peking University, Beijing 100871, China
2. LMAM, Department of Mathematics, Peking University, Beijing 100871, China

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Abstract

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.

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

Corresponding Author(s): Jingping YANG

Issue Date: 30 December 2014

Cite this article:

Yijun WU,Zhi ZHENG,Shulin ZHOU, et al. Dependence structure between LIBOR rates by copula method[J]. Front. Math. China, 2015, 10(1): 147-183.

URL:

https://academic.hep.com.cn/fmc/EN/10.1007/s11464-014-0315-4
https://academic.hep.com.cn/fmc/EN/Y2015/V10/I1/147

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