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There is an increasing complexity of risk neutral valuation models in the insurance industry, along with a growing regulatory attention on them. In particular, regulators require the interest rate model to replicate observed market prices, a key driver of model complexity, especially in terms of number of parameters involved. To highlight the benefits of one particular model, we cover the following topics:
- Analysis of market conditions for the three dates of interest
- Overview of the three variants of the Libor market model
- Comparison of the market consistent property of the three models
- Refinement of the model with constant elasticity volatility
Calibration accuracy of three variants of the Libor Market Model
We highlight a Libor market model with constant elastic volatility, showing an interesting trade-off between parameters used and quality of results.