Old and new approaches to LIBOR modeling

TL;DR

This paper reviews various modeling approaches for LIBOR rates, including classical, forward price, Markov-functional, and affine models, highlighting their properties and differences.

Contribution

It provides a comprehensive comparison of traditional and recent LIBOR modeling frameworks, emphasizing their construction and characteristics.

Findings

Classical LIBOR market models are foundational.

Affine LIBOR models offer new flexibility.

Comparison clarifies differences among approaches.

Abstract

In this article, we review the construction and properties of some popular approaches to modeling LIBOR rates. We discuss the following frameworks: classical LIBOR market models, forward price models and Markov-functional models. We close with the recently developed affine LIBOR models.