Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments
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Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments. / Crepey, Stephane; Macrina, Andrea; Nguyen, Tuyet Mai; Skovmand, David.
In: Quantitative Finance, Vol. 16, No. 6, 2016.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments
AU - Crepey, Stephane
AU - Macrina, Andrea
AU - Nguyen, Tuyet Mai
AU - Skovmand, David
N1 - 34 pages, 9 figures
PY - 2016
Y1 - 2016
N2 - We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model is sufficient to match market data with accuracy. We elucidate the relationship between the models developed and calibrated under a risk-neutral measure Q and their consistent equivalence class under the real-world probability measure P. The consistent P-pricing models are applied to compute the risk exposures which may be required to comply with regulatory obligations. In order to compute counterparty-risk valuation adjustments, such as CVA, we show how positive default intensity processes with rational form can be derived. We flesh out our study by applying the results to a basis swap contract.
AB - We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model is sufficient to match market data with accuracy. We elucidate the relationship between the models developed and calibrated under a risk-neutral measure Q and their consistent equivalence class under the real-world probability measure P. The consistent P-pricing models are applied to compute the risk exposures which may be required to comply with regulatory obligations. In order to compute counterparty-risk valuation adjustments, such as CVA, we show how positive default intensity processes with rational form can be derived. We flesh out our study by applying the results to a basis swap contract.
KW - q-fin.MF
M3 - Journal article
VL - 16
JO - Quantitative Finance
JF - Quantitative Finance
SN - 1469-7688
IS - 6
ER -
ID: 188789340