Interest-Rate Modelling in Collateralized Markets: Multiple Curves, Credit-Liquidity Effects, CCPs
25 Pages Posted: 4 Apr 2013
Date Written: April 4, 2013
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for pricing under credit, collateral and funding risks into term structure modelling, integrating the origination of different term structures with such effects. Under a number of assumptions on collateralization, wrong-way risk, gap risk, credit valuation adjustments and funding effects, including the treasury operational model, and via an immersion hypothesis, we are able to derive a synthetic master equation for the multiple term structure dynamics that integrates multiple curves with credit/funding adjustments.
Keywords: Yield Curve Dynamics, Multiple Curve Framework, HJM Framework, Interest Rate Derivatives, Basis Swaps, Counterparty Credit Risk, Liquidity Risk, Funding Costs, Central Clearing Counterparties
JEL Classification: G13
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