A L�vy HJM multiple-curve model with application to CVA computation

St�phane Cr�pey, Zorana Grbac, Nathalie Ngor and David Skovmand

Quantitative Finance, 2015, vol. 15, issue 3, 401-419

Abstract: We consider the problem of valuation of interest rate derivatives in the post-crisis set-up. We develop a multiple-curve model, set in the HJM framework and driven by a L�vy process. We proceed with joint calibration to OTM swaptions and co-terminal ATM swaptions of different tenors, the calibration to OTM swaptions guaranteeing that the model correctly captures volatility smile effects and the calibration to co-terminal ATM swaptions ensuring an appropriate term structure of the volatility in the model. To account for counterparty risk and funding issues, we use the calibrated multiple-curve model as an underlying model for CVA computation. We follow a reduced-form methodology through which the problem of pricing the counterparty risk and funding costs can be reduced to a pre-default Markovian BSDE, or an equivalent semi-linear PDE. As an illustration, we study the case of a basis swap and a related swaption, for which we compute the counterparty risk and funding adjustments.

Date: 2015
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Citations: View citations in EconPapers (15)

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DOI: 10.1080/14697688.2014.942232

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