Market Model

Toward the late 1990s, several research groups independently began developing new, related theories in mathematical finance. These theories did away with the standard stochastic geometric diffusion “Samuelson” market model (also known as the Black-Scholes model because it is used in that most famous theory), instead opting for models that allowed minimax approaches to complement or replace stochastic methods.

The LIBOR Market Model (LMM) is the first model of interest rates dynamics consistent with the market practice of pricing interest rate derivatives and therefore it is widely used by financial institution for valuation of interest rate derivatives.