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LIBOR Convexity Adjustments for the Vasicek and CIR models

Authors: R. Gaspar, B. Gaminha, O. Oliveira

Ref.: 6th Portuguese Finance Network Conference, 1-3 July, Ponta Delgada, Portugal (2010)

Abstract: In this paper we numerically implement some of the recent theoretical results concerning convexity adjustments derived within the affine term structure setup. The computation of the convexity adjustments in that setup is reduced to solving a system of ODES. Here we explore the Vasiv{c}ek and Cox-Ingersoll-Ross models within LIBOR-inarrears and investigate how the convexity adjustments change with the model parameters. The two models reproduce the same behavior with the convexity adjustment showing up as an additive constant for maturity times $> 5$ years.