Economics at your fingertips  

Multiple curve L\'evy forward price model allowing for negative interest rates

Ernst Eberlein, Christoph Gerhart and Zorana Grbac

Papers from

Abstract: In this paper we develop a framework for discretely compounding interest rates which is based on the forward price process approach. This approach has a number of advantages, in particular in the current market environment. Compared to the classical as well as the L\'evy Libor market model, it allows in a natural way for negative interest rates and has superb calibration properties even in the presence of extremely low rates. Moreover, the measure changes along the tenor structure are simplified significantly. These properties make it an excellent base for a post-crisis multiple curve setup. Two variants for multiple curve constructions are discussed. Time-inhomogeneous L\'evy processes are used as driving processes. An explicit formula for the valuation of caps is derived using Fourier transform techniques. Based on the valuation formula, we calibrate the two model variants to market data.

Date: 2018-05
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2018-05-19
Handle: RePEc:arx:papers:1805.02605