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LMM/BGM model for equity
Hi, I want to learn how to use the LMM/BGM model in order to model equities. All the papers i find on the LMM focus on the interest rates modeling. Is there a familiar paper about it? Is it popular to use that model for equities modeling? The reason i'm interested in that option is because i'm working with MUST which is a an added module to the Summit system, and they use the LMM as their model for equity and FX derivatives. Thanks in advance, Heli
LMM/BGM model for equity
BGM is probably overkill for equities. It has some use in commodities where forwards are substantially decorrelated, but in equities, 1-factor models (or 2-factor models as with Heston) are typically sufficient. That said, Heston-type models get prices for complex structures like Napoleons wrong, so forward skew models where the variance is a function of the spot process have been developed which are similar in some sense to BGM models.There's a paper by Zilber called 'A Market Model of Stochastic Smiles' that might be interesting to you.