Impact of multiple curve dynamics in credit valuation adjustments under collateralization

Bormetti, Giacomo; Brigo, Damiano; Francischello, Marco; Pallavicini, Andrea

doi:10.1080/14697688.2017.1339905

Cited by 8 publications

(15 citation statements)

References 20 publications

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“…For an extended discussion of the term θ τ we refer to [3]. Moreover, to derive an explicit valuation formula we assume that gap risk is not present, namelỹ V τ − =Ṽ τ , and we consider a particular form for collateral and close-out prices, namely we model the close-out value as…”

Section: The Master Equation Under Change Of Filtrationmentioning

confidence: 99%

“…This suggests that the MP model should be able to better capture the dynamics of the basis between two rates with different tenors. We refer the reader to [3] for a more detailed analysis of the issue, and to [23] for calibration and valuation examples for the swaptions and cap/floor market.…”

Section: H(t)mentioning

confidence: 99%

“…(8), together with the common separability constraint given in Eq. (9) are sufficient conditions to ensure the existence of a reconstruction formula for all OIS and LIBOR forward rates based on the very same family of Markov processes (see [3]). …”

Section: Multiple-curve Collateralized Hjm Frameworkmentioning

confidence: 99%

“…Here we focus our updated valuation framework to consider the following key points: (i) focus on interest rate derivatives; (ii) understand how the updated valuation framework can be helpful in defining the key market rates underlying the multiple interest rate curves that characterize current interest rate markets; (iii) define collateralized valuation measures; (iv) formulate a consistent realistic dynamics for the rates emerging from the above analysis; (v) show how the framework can be applied to valuation of particularly sensitive products such as basis swaps under credit risk and collateral posting;(vi) point out limitations in some current market practices such as explaining the multiple curves through deterministic fudge factors or shifts where the option embedded in the credit valuation adjustment (CVA) calculation would be priced without any volatility. For an extended version of this paper we remand to [3]. This paper is an extended and refined version of ideas originally appeared in [24].…”

mentioning

confidence: 99%

See 3 more Smart Citations

Impact of Multiple-Curve Dynamics in Credit Valuation Adjustments

Bormetti

Brigo

Francischello

et al. 2016

Innovations in Derivatives Markets

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We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al. (2011) can be helpful in defining the key market rates underlying the multiple interest rate curves that characterize current interest rate markets. We introduce the collateralized valuation measures and formulate a consistent realistic dynamics for the rates emerging from our analysis. We point out limitations of multiple curve models with deterministic basis considering valuation of particularly sensitive products such as basis swaps.

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Section: The Master Equation Under Change Of Filtrationmentioning

confidence: 99%

Section: H(t)mentioning

confidence: 99%

Section: Multiple-curve Collateralized Hjm Frameworkmentioning

confidence: 99%

mentioning

confidence: 99%

See 2 more Smart Citations

Impact of Multiple-Curve Dynamics in Credit Valuation Adjustments

Bormetti

Brigo

Francischello

et al. 2016

Innovations in Derivatives Markets

Self Cite

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“…For more details on this issue see Eqs. (5)- (7) and the paragraph following them, as well as the paper by Bormetti et al [1] and a corresponding version in this volume. This has led practitioners and academics alike to construct multi-curve models where future cash flows are generated through curves associated to the underlying rates (typically the Libor, one for each tenor structure), but are discounted by another curve.…”

Section: Introductionmentioning

confidence: 99%

Derivative Pricing for a Multi-curve Extension of the Gaussian, Exponentially Quadratic Short Rate Model

Grbac

Meneghello

Runggaldier

2016

Innovations in Derivatives Markets

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The recent financial crisis has led to so-called multi-curve models for the term structure. Here we study a multi-curve extension of short rate models where, in addition to the short rate itself, we introduce short rate spreads. In particular, we consider a Gaussian factor model where the short rate and the spreads are second order polynomials of Gaussian factor processes. This leads to an exponentially quadratic model class that is less well known than the exponentially affine class. In the latter class the factors enter linearly and for positivity one considers square root factor processes. While the square root factors in the affine class have more involved distributions, in the quadratic class the factors remain Gaussian and this leads to various advantages, in particular for derivative pricing. After some preliminaries on martingale modeling in the multi-curve setup, we concentrate on pricing of linear and optional derivatives. For linear derivatives, we exhibit an adjustment factor that allows one to pass from pre-crisis single curve values to the corresponding post-crisis multi-curve values.Keywords Multi-curve models · Short rate models · Short rate spreads · Gaussian exponentially quadratic models · Pricing of linear and optional interest rate derivatives · Riccati equations · Adjustment factors

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