A Note on Dual-Curve Construction: Mr. Crab's Bootstrap

Roberto Baviera and Alessandro Cassaro

Applied Mathematical Finance, 2015, vol. 22, issue 2, 105-132

Abstract: Observe crabs in the sand of our beaches: they move forward, backward and then forward again. Before the crisis, the standard bootstrap of interest rate curves was a 'Forward'-looking iterative algorithm where only information from previous knots was used to find discounts at subsequent dates.In this note we describe a new bootstrapping technique that involves various 'Backward' steps, which are reminiscent of a crab's steps: this new methodology coherently considers now standard dual-curve framework. Two other major results emerge from the bootstrap methodology described: (i) discounts are independent from the chosen interpolation rule for all practical purposes; and (ii) convexity adjustments to Short-Term Interest Rate futures can be dealt with using a methodology in line with market practice.

Date: 2015
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DOI: 10.1080/1350486X.2014.959665

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