A Flexible Spot Multiple-Curve Model

Abstract

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 specifications 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 specification

JEL Classification: G13