Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Biffis, Enrico & Blake, David & Pitotti, Lorenzo & Sun, Ariel, 2011. "The cost of counterparty risk and collateralization in longevity swaps," MPRA Paper 35740, University Library of Munich, Germany.
- Henrard, Marc, 2007. "The irony in the derivatives discounting," MPRA Paper 3115, University Library of Munich, Germany.
- 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.
- Andrea Pallavicini & Marco Tarenghi, 2010. "Interest-Rate Modeling with Multiple Yield Curves," Papers 1006.4767, arXiv.org.
- Nicola Moreni & Andrea Pallavicini, 2010. "Parsimonious HJM Modelling for Multiple Yield-Curve Dynamics," Papers 1011.0828, arXiv.org.
- Eisenschmidt, Jens & Tapking, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
- Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos-Sklibosios, 2010. "Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility," Research Paper Series 283, Quantitative Finance Research Centre, University of Technology, Sydney.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1304.1397. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.