Continuous tenor extension of affine LIBOR models with multiple curves and applications to XVA

DOI10.1186/S41546-017-0025-4zbMATH Open1432.91129arXiv1607.03522OpenAlexW2463187216WikidataQ59602834 ScholiaQ59602834MaRDI QIDQ2296110FDOQ2296110

Authors: Antonis Papapantoleon, Robert Wardenga 

Publication date: 17 February 2020

Published in: Probability, Uncertainty and Quantitative Risk (Search for Journal in Brave)

Abstract: We consider the class of affine LIBOR models with multiple curves, which is an analytically tractable class of discrete tenor models that easily accommodates positive or negative interest rates and positive spreads. By introducing an interpolating function, we extend the affine LIBOR models to a continuous tenor and derive expressions for the instantaneous forward rate and the short rate. We show that the continuous tenor model is arbitrage-free, that the analytical tractability is retained under the spot martingale measure, and that under mild conditions an interpolating function can be found such that the extended model fits any initial forward curve. This allows us to compute value adjustments (i.e. XVAs) consistently, by solving the corresponding `pre-default' BSDE. As an application, we compute the price and value adjustments for a basis swap, and study the model risk associated to different interpolating functions.

Full work available at URL: https://arxiv.org/abs/1607.03522

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zbMATH Keywords

interpolationmodel riskaffine LIBOR modelsmultiple curvesXVAcontinuous tenordiscrete tenor

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with continuous parameter (60G44) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (1)

• Affine LIBOR models with multiple curves: theory, examples and calibration

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