LIBOR market model

The LIBOR market model ( also BGM model according to its authors Brace, Gatarek and Musiela ) is a term structure model for the valuation of interest rate derivatives, particularly complex interest rate derivatives. Unlike other models, it uses observable market LIBOR rates.

Model

In the LIBOR market model for forward interest rates, a dynamics of the form

Accepted. Herein, the forward interest rate for the period. For a single forward interest rate, the model corresponds to the Black model. Compared to the Black model the dynamics of an entire family of forward interest rates is viewed under a uniform measure in the LIBOR market model.