back to Damiano Brigo’s professional page. Interest Rate Models: Theory and Practice – With Smile, Inflation and Credit. (, 2nd Ed. ) by Damiano Brigo. Interest Rate Models – Theory and Practice: With Smile, Inflation and Credit. Front Cover ยท Damiano Brigo, Fabio Mercurio. Springer Science. The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably.

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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 CDSCDS Options and Constant Maturity CDS – are discussed, building on the basic short rate-models and market models introduced earlier for the practcie market.

A solid, widely accepted reference on fixed income modeling.

Advanced undergraduate students, graduate students and researchers should benefit as well from seeing how some sophisticated mathematics yheory be used in concrete financial problems. Examples of calibrations to real market data are now considered. Examples of calibrations to real market data are now considered.

Readers interested in counterparty risk will be exposed to an interesting assertion, namely that the value of practoce generic claim that has counterparty risk is always less than the value of a similar claim whose counterparty has a probability intsrest default equal to zero.

There is also an excellent list of “theoretical” and “practical” questions in the preface that the authors use to motivate the book, along with a detailed summary of upcoming chapters.

This filtration can be viewed as essentially a collection of events that occur or not depending on the history of the stock price. The authors though are aware of such reactions to financial modeling, and actually devote the end of the book to a hypothetical conversation between traders and modelers but omitting some of the interezt that can occur between these groups.


Interest-Rate Models: Theory and Practice – Research Portal, King’s College, London

Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments. The calibration must then be done simultaneously when this is not the case.

The authors show that a market is free of arbitrage if and only if there is a martingale measure, brgo that a market is complete if and only if the martingale measure is unique. Arguments are given as to whether all choices of kernel can result in viable interest rate models. Interest Rate Models – Theory and Practice: It is true that every month a new book on financial modeling or on mathematical finance comes praactice, but this is a good one.

The authors give an overview of these entities for the curious reader but do not use them in the book. 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 interet.

Professional Area of Damiano Brigo’s web site

The bearer will obtain a payment at expiry, the size of which depends on the prior price history. This is an area that is rarely covered by books on mathematical finance. In particular, they show that the probability to default after a given time, i. The 2nd edition of this successful book has several new features.

Hheory model that particularly stands out in this regard is due to B. Not really, but the authors do explain how the correlation can be ignored, since it has little impact on credit default swaps.

The authors want to go beyond this model by searching for one that will reproduce any observed term structure of interest rates but that will preserve analytical tractability. It is shown that every contingent claim is attainable in a complete market.


I really enjoyed the experience having him as my Professor. Places on the web where pactice book can be ordered. The authors spend a fair amount of time explaining why these models are suitable for credit spreads.

The lack of ttheory economic interpretation for the default event is to be contrasted with term structure models, and the authors discuss this in detail. One is led to ask in this case, and in general, whether interest rate data can serve as a proxy of default calibration, and vice versa. Written more from an academic’s than practitioner’s perspective, it is nevertheless useful for someone who has a need for the underlying theory.

His class is really fantastic as well as the book he wrote. For those who have a sufficiently strong mathematical anc, this book is a must.

Interest Rate Models Theory and Practice

The same goes for a choice of numeraire for pricing a contingent claim, and practce authors give a detailed overview of what is involved in doing so. Mosels but it still contains useful proof of formulas. Overall, this is by far the best interest rate models book in the market. 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.