A consistent stochastic model of the term structure of interest rates for multiple tenors

Alfeus, M; Grasselli, M; Schlögl, E

A consistent stochastic model of the term structure of interest rates for multiple tenors

Alfeus, M Grasselli, M Schlögl, E

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Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Journal of Economic Dynamics and Control, 2020, 114, pp. 103861-103861
Issue Date:: 2020-05-01

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Field	Value	Language
dc.contributor.author	Alfeus, M
dc.contributor.author	Grasselli, M
dc.contributor.author	Schlögl, E
dc.date.accessioned	2020-11-17T19:36:58Z
dc.date.available	2020-11-17T19:36:58Z
dc.date.issued	2020-05-01
dc.identifier.citation	Journal of Economic Dynamics and Control, 2020, 114, pp. 103861-103861
dc.identifier.issn	0165-1889
dc.identifier.uri	http://hdl.handle.net/10453/144096
dc.description.abstract	© 2020 Elsevier B.V. Starting from the observation that single-currency swap basis spreads contradict classical arbitrage arguments, we construct a framework where this basis arises due to the presence of “roll-over risk.” This risk consists of two components: (1) facing a higher credit spread (e.g. due to a credit downgrade) when rolling over short-term borrowing (2) heightened borrowing costs due to an absence of market liquidity. The model simultaneously fits OIS, interest rate swap and basis swap market quotes. Including CDS market quotes allows the two components of roll-over risk to be explicitly separated. This is highly relevant to the current LIBOR transition, illustrating why alternative benchmarks are fundamentally different from the rates they may be replacing.
dc.language	en
dc.publisher	Elsevier
dc.relation.ispartof	Journal of Economic Dynamics and Control
dc.relation.isbasedon	10.1016/j.jedc.2020.103861
dc.rights	info:eu-repo/semantics/restrictedAccess
dc.subject	1401 Economic Theory, 1402 Applied Economics, 1502 Banking, Finance and Investment
dc.subject.classification	Economics
dc.title	A consistent stochastic model of the term structure of interest rates for multiple tenors
dc.type	Journal Article
utslib.citation.volume	114
utslib.for	1401 Economic Theory
utslib.for	1402 Applied Economics
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
pubs.organisational-group	/University of Technology Sydney
utslib.copyright.status	closed_access	*
pubs.consider-herdc	false
dc.date.updated	2020-11-17T19:36:55Z
pubs.publication-status	Published
pubs.volume	114

Abstract:

© 2020 Elsevier B.V. Starting from the observation that single-currency swap basis spreads contradict classical arbitrage arguments, we construct a framework where this basis arises due to the presence of “roll-over risk.” This risk consists of two components: (1) facing a higher credit spread (e.g. due to a credit downgrade) when rolling over short-term borrowing (2) heightened borrowing costs due to an absence of market liquidity. The model simultaneously fits OIS, interest rate swap and basis swap market quotes. Including CDS market quotes allows the two components of roll-over risk to be explicitly separated. This is highly relevant to the current LIBOR transition, illustrating why alternative benchmarks are fundamentally different from the rates they may be replacing.

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http://hdl.handle.net/10453/144096