Hybrid Model: A Dynamic Multi-Curve Framework

Model development, muRisQ Advisory, August 2018.

40 Pages Posted: 4 Sep 2018 Last revised: 27 Sep 2018

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Date Written: August 22, 2018

Abstract

Over the last 10 years, the multi-curve and collateral framework has become the standard for vanilla interest rate derivatives pricing. The static description of the framework, including the curve calibration, is well documented. When going to the dynamic behaviour of the framework, the modelling has not evolved as much and no approach to modelling the multi-curve framework is considered a standard. In this note, we propose an approach to multi-curve framework modelling. We call it hybrid approach as it is based on standard models for the discounting curve and an adjusted approach for IBOR curves which is design to have a natural control on the basis. We show that the approach can match simultaneously the main features of the option market and of historical data.

Keywords: Multi-Curve Framework, Interest Rate Model, Stochastic Spread, Historical Data, Calibration

JEL Classification: G13, G15

Suggested Citation

Henrard, Marc P. A., Hybrid Model: A Dynamic Multi-Curve Framework (August 22, 2018). Model development, muRisQ Advisory, August 2018.. Available at SSRN: https://ssrn.com/abstract=3237403 or http://dx.doi.org/10.2139/ssrn.3237403

Marc P. A. Henrard (Contact Author)

muRisQ Advisory ( email )

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Belgium

HOME PAGE: http://murisq.com

OpenGamma ( email )

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London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

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London, WC1E 6BT
United Kingdom

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