The Multi-Curve Potential Model

26 Pages Posted: 28 Sep 2014 Last revised: 3 Sep 2015

Date Written: August 24, 2015

Abstract

We develop a general class of multi-curve potential models for post-crisis interest rates. Our model features positive stochastic basis spreads, positive term structures, and analytic pricing formulae for interest rate derivatives. Making a quanto interpretation of LIBOR lending transactions, we use a multi-currency analogy to model multiple term structures and formulate a general, tractable model of multiple term structures. As a special case of our approach, we obtain a rational lognormal model that extends the original Flesaker-Hughston (1996) rational lognormal model to a multi-curve setting. In this setting we obtain analytic pricing formulae for caps and swaptions.

Keywords: Multi-curve models, potential approach, state-price deflator, foreign exchange rates, rational lognormal model, OIS, LIBOR, FRA rate, FRA spread, LIBOR-OIS spread

JEL Classification: E43, G12, G13

Suggested Citation

Nguyen, The and Seifried, Frank Thomas, The Multi-Curve Potential Model (August 24, 2015). Available at SSRN: https://ssrn.com/abstract=2502374 or http://dx.doi.org/10.2139/ssrn.2502374

The Nguyen

Deutsche Bank AG ( email )

Otto-Suhr-Allee Strasse 6-16
Berlin, 10585
Germany

Frank Thomas Seifried (Contact Author)

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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