Markovian and multi-curve friendly parametrisation of HJM model used in valuation adjustment of interest rate derivatives

Marcin Dec ()

No 2018-038, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: We consider feasible Heath-Jarrow-Morton framework specifications that are easily implementable in XVA engines when pricing linear and non-linear interest rate derivatives in multicurve environment. Our particular focus is on relatively less liquid markets (Polish PLN) and the calibration problems arising from that fact. We first develop necessary tool-kit for multicurve construction and XVA integration and then show and discuss various specifications of HJM model with regard to their practical usage. We demonstrate the importance of Cheyette subclass and derive dynamics of instantaneous forward rates in generic form. We performed calibrations of several one-factor models of that form and found out that even with relatively simple specification i.e. Hull-White with two summands we may achieve satisfactory results in terms of calibration's quality and calculation time.

Keywords: instantaneous forward rate models; multi-curve valuation; valuation adjustments; XVA; Heath-Jarrow-Morton; volatility surface calibration; HJM framework; Monte Carlo simulation; Cheyette model; Gaussian models (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-06
New Economics Papers: this item is included in nep-mac
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http://hdl.handle.net/20.500.12182/1119 (application/pdf)

Related works:
Journal Article: Markovian and multi-curve friendly parametrisation of a HJM model used in valuation adjustment of interest rate derivatives (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2018038

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