re Libor models - skew parametrization

Posted by Mark joshi-2 on Mar 31, 2009; 9:41am
URL: http://quantlib.414.s1.nabble.com/re-Libor-models-skew-parametrization-tp7304.html

Well, if you allow an arbitrary skew parametrization the SDEs are no
longer solvable even when the drift is zero.
All modelling is a compromise between tractability and realism,
displaced diffusion is just as tractable as log-normal and so is a
natural choice.

The volatilities in the model are to be interpreted as the
volatilities of the displaced log-rates. If all your displacements are
equal then there is no loss of time homogeneity. If they are not
clearly there is.

As to what is usual, well that's always an interesting question...

regards

Mark

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