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Modelling stochastic multi-curve basis
As a consequence of the 2007 financial crisis, the market has shifted towards a multi-curve approach in modelling the prevailing interest rate environment. Currently, there is a reliance on the assumption of deterministic- or constant-basis spreads. This assumption is too simplistic to describe the...
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| Format: | Thesis |
| Language: | English |
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Division of Actuarial Science
2018
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| _version_ | 1867614369062322176 |
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| access_status_str | Open Access |
| author | Dalton, Rowan |
| author2 | Kienitz, Jörg |
| author_browse | Dalton, Rowan Kienitz, Jörg |
| author_facet | Kienitz, Jörg Dalton, Rowan |
| author_sort | Dalton, Rowan |
| collection | Thesis |
| description | As a consequence of the 2007 financial crisis, the market has shifted towards a multi-curve approach in modelling the prevailing interest rate environment. Currently, there is a reliance on the assumption of deterministic- or constant-basis spreads. This assumption is too simplistic to describe the modern multi-curve environment and serves as the motivation for this work. A stochastic-basis framework, presented by Mercurio and Xie (2012), with one- and two-factor OIS short-rate models is reviewed and implemented in order to analyse the effect of the inclusion of stochastic-basis in the pricing of interest rate derivatives. In order to preclude the existence of negative spreads in the model, a constraint on the spread model parameters is necessary. The inclusion of stochastic-basis results in a clear shift in the terminal distributions of FRA and swap rates. In spite of this, stochastic-basis is found to have a negligible effect on cap/floor and swaption prices for the admissible spread model parameters. To overcome challenges surrounding parameter estimation under the framework, a rudimentary calibration procedure is developed, where the spread model parameters are estimated from historical data; and the OIS rate model parameters are calibrated to a market swaption volatility surface. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/27102 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:50:56.726Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2018 |
| publishDateRange | 2018 |
| publishDateSort | 2018 |
| publisher | Division of Actuarial Science |
| publisherStr | Division of Actuarial Science |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/27102 Modelling stochastic multi-curve basis Dalton, Rowan Kienitz, Jörg McWalter, Thomas Mathematical Finance As a consequence of the 2007 financial crisis, the market has shifted towards a multi-curve approach in modelling the prevailing interest rate environment. Currently, there is a reliance on the assumption of deterministic- or constant-basis spreads. This assumption is too simplistic to describe the modern multi-curve environment and serves as the motivation for this work. A stochastic-basis framework, presented by Mercurio and Xie (2012), with one- and two-factor OIS short-rate models is reviewed and implemented in order to analyse the effect of the inclusion of stochastic-basis in the pricing of interest rate derivatives. In order to preclude the existence of negative spreads in the model, a constraint on the spread model parameters is necessary. The inclusion of stochastic-basis results in a clear shift in the terminal distributions of FRA and swap rates. In spite of this, stochastic-basis is found to have a negligible effect on cap/floor and swaption prices for the admissible spread model parameters. To overcome challenges surrounding parameter estimation under the framework, a rudimentary calibration procedure is developed, where the spread model parameters are estimated from historical data; and the OIS rate model parameters are calibrated to a market swaption volatility surface. 2018-01-30T10:26:26Z 2018-01-30T10:26:26Z 2017 Master Thesis Masters MPhil http://hdl.handle.net/11427/27102 eng application/pdf Division of Actuarial Science Faculty of Commerce University of Cape Town |
| spellingShingle | Mathematical Finance Dalton, Rowan Modelling stochastic multi-curve basis |
| thesis_degree_str | Master's |
| title | Modelling stochastic multi-curve basis |
| title_full | Modelling stochastic multi-curve basis |
| title_fullStr | Modelling stochastic multi-curve basis |
| title_full_unstemmed | Modelling stochastic multi-curve basis |
| title_short | Modelling stochastic multi-curve basis |
| title_sort | modelling stochastic multi curve basis |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/27102 |
| work_keys_str_mv | AT daltonrowan modellingstochasticmulticurvebasis |