The ABCD of Interest Rate Basis Spreads

20 Pages Posted: 30 Nov 2015 Last revised: 13 Jul 2016

See all articles by Ferdinando M. Ametrano

Ferdinando M. Ametrano

Digital Gold Institute; Università Milano-Bicocca - Department of Statistics and Quantitative Methods; Politecnico di Milano - Department of Mathematics; QuantLib

Luigi Ballabio

StatPro Italia Srl; QuantLib

Paolo Mazzocchi

Deloitte

Date Written: November 30, 2015

Abstract

We show that forward rates can be modeled as ABCD parametric tenor basis spreads over the underlying overnight rate curve. This is possible for both continuously and simply compounded forward rates, with a simple approximation for converting between the corresponding basis. Increasing interest-rate tenor dominance, as empirically observed, is recovered and can be structurally enforced using a robust methodology improvement based on relative basis between the most liquid tenors. The smoothness requirement is moved from forward rate curves to tenor basis curves, properly dealing with the market evidence of jumps in forward rates. In the case of continuously compounded tenor basis, pseudo-discount factors are also available. An implementation of this methodology is available in the QuantLib open-source project.

Keywords: forward rates, basis, multi-curve, multi-curve modelling, tenor basis spread, ABCD, pseudo-discount factors, Libor, Euribor, Eonia, yield curve, discount curve, bootstrapping, Deposit, FRA, Future, Swap, IRS, OIS, Basis Swap, turn of year, QuantLib

JEL Classification: E43, G12, G13

Suggested Citation

Ametrano, Ferdinando M. and Ballabio, Luigi and Mazzocchi, Paolo, The ABCD of Interest Rate Basis Spreads (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2696743 or http://dx.doi.org/10.2139/ssrn.2696743

Ferdinando M. Ametrano (Contact Author)

Digital Gold Institute ( email )

Italy

HOME PAGE: http://dgi.io

Università Milano-Bicocca - Department of Statistics and Quantitative Methods ( email )

Milano, 20126
Italy

Politecnico di Milano - Department of Mathematics ( email )

Via Bonardi, 9
Milano, MI 20133
Italy

QuantLib ( email )

HOME PAGE: http://quantlib.org

Luigi Ballabio

StatPro Italia Srl ( email )

via E. de Amicis 53
Milano, 20123
Italy

QuantLib ( email )

Paolo Mazzocchi

Deloitte ( email )

Via Tortona, 25
Milano
Italy

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