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

  • Andrea Pallavicini
  • Damiano Brigo

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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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
Contact details of provider: Web page: http://arxiv.org/

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  1. 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.
  2. 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.
  3. Eisenschmidt, Jens & Tapking, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
  4. Andrea Pallavicini & Marco Tarenghi, 2010. "Interest-Rate Modeling with Multiple Yield Curves," Papers 1006.4767, arXiv.org.
  5. 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.
  6. Henrard, Marc, 2007. "The irony in the derivatives discounting," MPRA Paper 3115, University Library of Munich, Germany.
  7. Nicola Moreni & Andrea Pallavicini, 2010. "Parsimonious HJM Modelling for Multiple Yield-Curve Dynamics," Papers 1011.0828, arXiv.org.
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