Multi-Curve Discounting

Bert-Jan Nauta

MPRA Paper from University Library of Munich, Germany

Abstract: This note considers the valuation of assets and liabilities on a balance sheet with liquidity risk. It introduces the multi-curve discounting (MCD) method, where the discount curve depends on the liquidity horizon of the asset. The difference between the value of an asset using OIS discounting and a discount curve referencing the liquidity horizon can be interpreted as a Funding Valuation Adjustment (FVA). We show that a simple model for liquidity risk implies MCD. The liquidity risk model formulation clarifies how a non-zero FVA occurs without violating the Modigliani-Miller theorem.

Keywords: Discounting; Valuation; Liquidity Risk; ALM; Liquidity; FVA; XVA; Funding costs (search for similar items in EconPapers)
JEL-codes: G12 G13 G20 (search for similar items in EconPapers)
Date: 2016-04-20, Revised 2018-02-20
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:85657

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