Multi-Curve HJM Modelling for Risk Management

Sabelli, Chiara; Pioppí, M.; Sitzia, Luca; Bormetti, Giacomo

doi:10.2139/ssrn.2524525

Cited by 1 publication

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“…As a result, the class of multi-curve stochastic interest rate models was introduced which is more consistent with this phenomenon observed in current financial markets but requires considerably more computational efforts to implement in practice (see, e.g. Grbac and Runggaldier 2015, Eberlein and Gerhart 2018, Sabelli et al 2018, Cuchiero et al 2019.…”

Section: Introductionmentioning

confidence: 90%

Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model

Verschuren

2020

Quantitative Finance

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In current financial markets negative interest rates have become rather persistent, while in theory it is often common practice to discard such rates as incredible and irrelevant. However, from a risk management perspective, it is crucially important to financial institutions to properly account for this phenomenon in their Asset Liability Management (ALM) studies. In this paper, we develop a coherent framework on how to best incorporate negative interest rates in these studies through a single curve stochastic term structure model and compare it to its multiple curve analogue. It turns out that, from the wide range of available single curve models, especially the Lévy Forward Price model (LFPM) of Eberlein and Özkan [The Lévy LIBOR model. Financ. Stoch., 2005, 9, 327-348] seems appropriate for ALM purposes. This paper describes an optimisation routine for calibrating this LFPM under the risk-neutral measure in both the single and multiple curve framework to the market prices of interest rate caplets with different strike rates, maturities and tenors. In addition, an empirical performance analysis is made of the single and multiple curve LFPM, where we include four deterministic volatility specifications and provide an explicit parametrisation of a piecewise homogeneity restriction with both deterministic and random breakpoints. This comparative analysis indicates that both the single and multiple curve LFPM is best adopted with the Linear-Exponential Volatility (LEV) specification and that deterministic breakpoints should be included, rather than random breakpoints.

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Section: Introductionmentioning

confidence: 90%

Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model

Verschuren

2020

Quantitative Finance

View full text Add to dashboard Cite

show abstract

Multi-Curve HJM Modelling for Risk Management

Cited by 1 publication

References 58 publications

Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model

Stochastic interest rate modelling using a single or multiple curves: an empirical performance analysis of the Lévy forward price model

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