ABSTRACT

Shifted (or displaced diffusion) BGM generalizes flat BGM by making the combination of a cash forwardK (t, T ) plus a shift a (T ) lognormal under PT+δ with deterministic volatility ξ (t, T ). By varying the shift a (T ) the resulting model can be made to move between flat BGM (a (T ) = 0) and Gaussian HJM (a (T ) = 1δ ). That sort of flexibility is viewed as a plus by those traders who see the market either behaving normally or at least something less than lognormally. A disadvantage (acceptable in other models) is that rates can go negative.