Crepey, S;
Macrina, A;
Nguyen, TM;
Skovmand, D;
(2015)
Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments.
Quantitative Finance
, 16
(6)
pp. 847-866.
10.1080/14697688.2015.1095348.
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Abstract
We present models for multi-curve term structures and counterparty risk valuation adjustments, which are given in terms of rational functions of stochastic drivers. The pricing models are versatile and can be calibrated to available market data. Depending on the type of the rational model that is employed, option prices can be calculated by Fourier schemes or semi-analytical expressions can be derived. An appealing feature of the constructed multi-curve models is that the relation between the price dynamics under the risk-neutral and the real-world probability measures is transparent and it can be modelled directly. This property is important when multi-curve term structure models are applied jointly with counterparty risk valuation adjustments where the models may be priced and calibrated under a risk-neutral measure Q and risks must be quantified, and their statistics assessed, with respect to the real-world probability measure P. The relation between the P and Q price dynamics is studied further by representing the price models in terms of the associated pricing kernels.
| Type: | Article |
|---|---|
| Title: | Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1080/14697688.2015.1095348 |
| Publisher version: | http://dx.doi.org/10.1080/14697688.2015.1095348 |
| Language: | English |
| Additional information: | This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 18 November 2015, available online: http://wwww.tandfonline.com/10.1080/14697688.2015.1095348. |
| Keywords: | Multi-curve interest rate models, rational Markov functionals, calibration to option data, swap exposures, XVA analysis |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/1453783 |
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