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    RiO2020_ErnstEberlein

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    Aidan Holwerda

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    © All Rights Reserved
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    RiO2020_ErnstEberlein

    Uploaded by

    Aidan Holwerda
    1 views1 page

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    1 views1 page

    RiO2020_ErnstEberlein

    Uploaded by

    Aidan Holwerda

    Copyright:

    © All Rights Reserved
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    A Multiple Curve Lévy Swap Market Model

    Ernst Eberlein
    Department of Mathematical Stochastics
    University of Freiburg

    The global financial crisis which started in 2007 changed the fixed income markets in a
    fundamental way. Due to a new perception of risk, a number of interest rates, which until
    then had been roughly equivalent, drifted apart. The basic rates, which are relevant for the
    interbank market, became tenor-dependent. In the new multiple curve reality classical
    modeling approaches which are based on no-arbitrage considerations assuming tenor-
    independence cannot reflect the market behaviour any more. As a consequence a large
    variety of modelling approaches of increasing mathematical sophistication has been studied
    in recent years.

    We present here an arbitrage free multiple curve model for the interest rate market through
    the specification of forward swap rates. The market has two sets of assets as fundamentals:
    OIS zero-coupon bonds for all maturities as well as forward rate agreements for all tenors,
    settlement dates and strikes. In contrast to most of the approaches considered so far where
    short rates or instantaneous forward rates as well as IBOR rates or forward processes are
    chosen as the basic quantities which are to be modeled, we consider here the dynamics of
    the swap rates directly. This is a very natural approach since on one side we build on OIS
    bonds and on the other side the mid and long maturity part of the term structure is
    bootstrapped from swap quotes. The rates are constructed via a backward induction along
    the tenor structure on the basis of the forward swap measures. Time-inhomogeneous Lévy
    processes are used as drivers. As an application we derive an explicit Fourier based
    valuation formula for swaptions and present some calibration results.

    This is joint work with Christoph Gerhart and Eva Lütkebohmert.

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