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The Anh Nguyen () and Frank Thomas Seifried
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The Anh Nguyen: Department of Mathematics, University of Kaiserslautern, 67663 Kaiserslautern, Germany
Frank Thomas Seifried: Department IV – Mathematics, University of Trier, Universitätsring 19, 54296 Trier, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 07, 1-32

Abstract: We develop a general class of multi-curve potential models for post-crisis interest rates. Our model features positive stochastic basis spreads, positive term structures, and analytic pricing formulae for interest rate derivatives. Making a quanto interpretation of LIBOR lending transactions, we use a multi-currency analogy to model multiple term structures and formulate a general, tractable model of multiple term structures. As a special case of our approach, we obtain a rational lognormal model that extends the original Flesaker–Hughston (1996) rational lognormal model to a multi-curve setting. In this setting we obtain analytic pricing formulae for caps and swaptions.

Keywords: Multi-curve models; potential approach; state-price deflator; foreign exchange rates; rational lognormal model; OIS; LIBOR; FRA rate; FRA spread; LIBOR–OIS spread (search for similar items in EconPapers)
Date: 2015
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