A Flexible Spot Multiple-Curve Model
24 Pages Posted: 13 Apr 2014
Date Written: April 12, 2014
We propose a model for the instantaneous risk-free spot rate and for the spot LIBOR, driven by a time-homogeneous Markovian process. We introduce deterministic time-shifts in order to match any initial term-structure. By doing so, the model automatically becomes an exogenous term-structure model, in the spirit of Brigo and Mercurio (2001) who proposed this approach in the single curve case. A calibration exercise based on real data illustrates the flexibility of our approach for some typical specifications used in the literature and in the bank industry.
Keywords: Short rate models, Multiple-curve interest rate model, LIBOR-OIS spread, Analytical tractability, Calibration to market data, Affine specification
JEL Classification: G13
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