back to Damiano Brigo's professional page

Interest Rate Models: Theory and Practice -

With Smile, Inflation and Credit

(2001, 2nd Ed. 2006)

by Damiano Brigo and Fabio Mercurio

The following information is available:

Book Description from the Back Cover 

Sample text from the book preface , featuring a description by chapter

Extended table of contents, where the extended table of contents is available.

Praise for the first and second editions, where short reviews or comments from colleagues are reported.  

Places on the web where the book can be ordered.

back to Damiano Brigo's professional page 

Book Description from the Back Cover (First and Second Edition )

First Edition, 2001:

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 investigation. 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 market 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.

Second Edition, 2006:

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 modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS 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.

back to top

Praise for the first edition

The text is 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: at the same time concise and pedagogically fresh. 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.

Prof. Paul A.L. Embrechts, ETH-Zürich, author of "Extreme Value Theory", Springer Verlag.

(In: International Statistical Institute short book reviews)

This simultaneous attention to theory and practice is difficult to find in other available literature. [...] I also liked the chosen level of mathematical sophistication, which allows the treatment to be precise and financially accurate, without embedding the derivation in an overly cumbersome setting. [...] I would like to conclude by praising the eclecticism of their quotes, which range from Hamlet to the Gospels to DC Comics.

Dr Riccardo Rebonato, Royal Bank of Scotland, author of "The LIBOR market model and Beyond", Princeton University Press, and "Volatility and Correlation", Wiley.

(In: Points of Interest, book review for Risk Magazine, November 2001)

It is true that every month a new book on financial modeling or on mathematical finance comes out, but this is a good one.

Prof. Gheorghe Stoica

(In Mathematical Reviews, 2002d.)

Praise for the Second edition

The book ‘Interest Rate Models – Theory and Practice’ provides a wide overview of interest rate modeling in mathematical depth. … The authors found a good approach to present a mathematically demanding area in a very clear, understandable way. The book will most likely become … one of the standard references in the area. … if one were to buy only one book about interest rate models, this would be it.

David Skovmand and Michael Verhofen, Financial Markets and Portfolio Management, Vol. 21 (1), 2007)

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 text will provide you with excellent knowledge in theory and practice. … is simply a must for all. Especially, I would recommend this to students … . Overall, this is by far the best interest rate models book in the market."

Ita Cirovic Donev, MathDL, May, 2007

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. … Advanced undergraduate students, graduate students and researchers should benefit from reading this book and seeing how some sophisticated mathematics can be used in concrete financial problems.

Yuliya S. Mishura, Zentralblatt MATH, Vol. 1109 (11), 2007

back to top

Places on the web where the book can be ordered

The book can be ordered on-line at any of the following sites:

Springer-Verlag.  This is the publisher web site.

Barnes and Noble

Amazon UK

Amazon US

Global-Investor Bookshop

Amazon JP

Amazon DE

back to top

back to Damiano Brigo's professional page