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Multi-Curve Discounting

Author

Listed:
  • Nauta, Bert-Jan

Abstract

This note considers the valuation of assets and liabilities on a balance sheet with liquidity risk. It introduces the multi-curve discounting (MCD) method, where the discount curve depends on the liquidity horizon of the asset. The difference between the value of an asset using OIS discounting and a discount curve referencing the liquidity horizon can be interpreted as a Funding Valuation Adjustment (FVA). We show that a simple model for liquidity risk implies MCD. The liquidity risk model formulation clarifies how a non-zero FVA occurs without violating the Modigliani-Miller theorem.

Suggested Citation

  • Nauta, Bert-Jan, 2016. "Multi-Curve Discounting," MPRA Paper 85657, University Library of Munich, Germany, revised 20 Feb 2018.
    • Handle: RePEc:pra:mprapa:85657
    as

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    File URL: https://mpra.ub.uni-muenchen.de/85657/1/MPRA_paper_85657.pdf
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    References listed on IDEAS

    as
    1. Bert-Jan Nauta, 2015. "Liquidity Risk, Instead Of Funding Costs, Leads To A Valuation Adjustment For Derivatives And Other Assets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-30.
    Full references (including those not matched with items on IDEAS)

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    1. Nauta, Bert-Jan, 2016. "A Model for the Valuation of Assets with Liquidity Risk," MPRA Paper 92493, University Library of Munich, Germany.

    More about this item

    Keywords

    Discounting; Valuation; Liquidity Risk; ALM; Liquidity; FVA; XVA; Funding costs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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