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

DOI10.1186/S41546-017-0025-4MaRDI QIDQ2296110zbMATH OpenOpenAlexWikidataFDO

Authors Antonis Papapantoleon, Robert Wardenga

Publication date 17 February 2020

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

Copyright license Creative Commons Attribution 4.0 International

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

zbMATH Keywords

affine LIBOR modelscontinuous tenordiscrete tenorinterpolationmodel riskmultiple curvesXVA

Mathematics Subject Classification ID

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

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.

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Cited in

(1)

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

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