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back to Damiano Brigo’s professional page. Interest Rate Models: Theory and Practice – With Smile, Inflation and Credit. (, 2nd Ed. ) by Damiano Brigo. Basic concepts of stochastic modeling in interest rate theory, As a standard reference on interest rate theory I recommend. [Brigo and Mercurio()]. The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably.

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Sample text from the book prefacefeaturing a description by chapter.

Extended table of contentswhere the extended table of contents is available. Praise for the first and second editionswhere short reviews or comments from colleagues are reported. Places on the web where the book can be ordered. One of the major challenges any financial engineer has to cope with is the practical implementation of mathematical models for pricing derivative securities: One has to address a number of practical issues that are often neglected in the theory, such as the choice of a satisfactory model, the calibration of the selected model to a set of market data, the implementation of efficient routines, and so on.

Therefore, this book aims both at explaining rigorously how models work in theory and at suggesting how to implement them for concrete pricing.

This is an area that is rarely covered by books on mathematical finance. A clear benefit of the approach presented in this book is that practice can help to appreciate theory thus generating a feedback that is one of the most intriguing aspects of modeling and more generally of scientific inetrest.

Thus the book can help quantitative analysts and advanced traders price and hedge interest-rate derivatives with a sound theoretical apparatus, explaining which models can be used in practice for some major concrete problems. Moreover, the book can help academics develop a feeling for the practical problems in the interesy that can be solved with the use of relatively advanced tools of mathematics and stochastic calculus in particular.


Advanced undergraduate students, graduate students and researchers should benefit as well from seeing how some sophisticated mathematics can be used in concrete financial problems. The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs.

A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption -volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new part. New chapters on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach.

Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives.

The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modelingCredit Derivatives — mostly Credit Default Swaps CDSCDS Options and Constant Maturity CDS – are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market.

Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.

Praise for the first edition. The text rafe no doubt my favourite on the subject of interest rate modelling. It perfectly combines mathematical depth, historical perspective and practical relevance.

The fact that the authors combine a strong mathematical finance background with expert practice knowledge they both work in a bank contributes hugely to its format. I also admire the style of writing: The authors’ applied background allows for numerous comments on why certain models have or have not made it in practice. The theory is interwoven with detailed numerical examples.


A final Appendix “discussion” with a trader yields insight into current and future development of the field. For those who have a sufficiently strong mathematical background, this book is a must. International Statistical Institute short book reviews. This simultaneous attention to theory and practice is difficult to find in other available literature.

Points of Interest, book review for Risk Magazine, November It is true that every month a new book on financial modeling or on mathematical finance comes out, but this is a good one. In Mathematical Reviews, d. Praise for the Second edition.

Interest Rate Models Theory and Practice

The book will most likely become … one of the standard references in the area. This is the book on interest rate models and should proudly stand on the bookshelf of every quantitative finance practitioner and student involved with interest rate models. If you are looking for one reference on interest rate models then look no further as this modelw will provide you with excellent knowledge in theory interes practice.

Especially, I would recommend this to students …. Overall, this is by far the best interest rate models book in the market.

Interest Rate Models – Theory and Practice by Mercurio, Damiano Brigo; Fabio

This is a very detailed course on interest rate models. Its main goal is to construct some kind of bridge between theory and practice in this field. From one side, the authors would like to help quantitative analysts and advanced traders handle interest-rate derivatives with a sound theoretical apparatus. This is the publisher rwte site.