Multi-Curve Cheyette-Style Models with Lower Bounds on Tenor Basis Spreads

54 Pages Posted: 19 Feb 2020

Date Written: December 18, 2019

Abstract

The modeling of tenor basis spreads is of central importance to CVA for tenor basis swaps. Such spreads are typically positive, suggesting a natural lower bound. We introduce a multi- curve Cheyette-style model with lower bounds enforced through level dependence in spread volatilities. The model is intuitive, easy to implement, and admits approximate swaption pricing formulae under affine specifications. We also discuss the importance of incorporating historical spread data into calibration criteria, and we formalize an according calibration strategy.

Keywords: Multi-Curve, Tenor Basis, Cheyette

JEL Classification: C1, C5, C6

Suggested Citation

Konikov, Michael and McClelland, Andrew, Multi-Curve Cheyette-Style Models with Lower Bounds on Tenor Basis Spreads (December 18, 2019). Available at SSRN: https://ssrn.com/abstract=3524703 or http://dx.doi.org/10.2139/ssrn.3524703

Michael Konikov

Numerix ( email )

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New York, NY 10016
United States

Andrew McClelland (Contact Author)

Numerix ( email )

Level 34, 50 Bridge St
Sydney, NSW 2000
Australia
+61402494765 (Phone)

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