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Quantitative Finance · Glossary

What is Generalised forward market model?

Definition 10.5 Rates, Credit, XVA and Risk · Chapter 10 — Modelling Overnight-Rate Products

The generalised forward market model (Lyashenko and Mercurio, 2019) models, for each accrual period [Tk−1,Tk][T_{k-1},T_k], the forward Rk(t)=EtTk[R(Tk−1,Tk)]R_k(t) = \E^{T_k}_t[R(T_{k-1},T_k)] of the backward-looking rate, for all t≤Tkt\le T_k: before Tk−1T_{k-1} it coincides with the forward-looking forward of chapter 8, and during the period it keeps moving with the overnight fixings. Its volatility is σk(t)gk(t)\sigma_k(t)g_k(t) with gk=1g_k=1 before Tk−1T_{k-1} and gkg_k decaying to zero at TkT_k, for instance linearly.

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