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Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs

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  • Andrea Pallavicini
  • Damiano Brigo

Abstract

The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for pricing under credit, collateral and funding risks into term structure modelling, integrating the origination of different term structures with such effects. Under a number of assumptions on collateralization, wrong-way risk, gap risk, credit valuation adjustments and funding effects, including the treasury operational model, and via an immersion hypothesis, we are able to derive a synthetic master equation for the multiple term structure dynamics that integrates multiple curves with credit/funding adjustments.

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File URL: http://arxiv.org/pdf/1304.1397
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1304.1397.

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Date of creation: Apr 2013
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Handle: RePEc:arx:papers:1304.1397

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Web page: http://arxiv.org/

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References

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  1. Henrard, Marc, 2007. "The irony in the derivatives discounting," MPRA Paper 3115, University Library of Munich, Germany.
  2. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2012. "Funding, Collateral and Hedging: uncovering the mechanics and the subtleties of funding valuation adjustments," Papers 1210.3811, arXiv.org, revised Dec 2012.
  3. Andrea Pallavicini & Marco Tarenghi, 2010. "Interest-Rate Modeling with Multiple Yield Curves," Papers 1006.4767, arXiv.org.
  4. Nicola Moreni & Andrea Pallavicini, 2010. "Parsimonious HJM Modelling for Multiple Yield-Curve Dynamics," Papers 1011.0828, arXiv.org.
  5. Eisenschmidt, Jens & Tapking, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
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Cited by:
  1. Chris Kenyon & Andrew Green, 2013. "Regulatory-Optimal Funding," Papers 1310.3386, arXiv.org.
  2. Damiano Brigo & Andrea Pallavicini, 2013. "CCPs, Central Clearing, CSA, Credit Collateral and Funding Costs Valuation FAQ: Re-hypothecation, CVA, Closeout, Netting, WWR, Gap-Risk, Initial and Variation Margins, Multiple Discount Curves, FVA?," Papers 1312.0128, arXiv.org, revised Dec 2013.
  3. Laura Morino & Wolfgang J. Ruggaldier, 2014. "On multicurve models for the term structure," Papers 1401.5431, arXiv.org.
  4. Damiano Brigo & Andrea Pallavicini, 2014. "CCP Cleared or Bilateral CSA Trades with Initial/Variation Margins under credit, funding and wrong-way risks: A Unified Valuation Approach," Papers 1401.3994, arXiv.org.
  5. Damiano Brigo & Qing Liu & Andrea Pallavicini & David Sloth, 2014. "Nonlinear Valuation under Collateral, Credit Risk and Funding Costs: A Numerical Case Study Extending Black-Scholes," Papers 1404.7314, arXiv.org.

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