Post-Crisis Interest Rate Modelling
Specialeforsvar ved Simon Steinitz Andersen
Titel: Post-Crisis Interest Rate Modelling Modelling Roll-Over Risk
Abstract: Interest rate models specified within the stochastic model framework proposed by Alfeus, Grasselli and Schögl (2017) are calibrated to swap market data covering the period from January 2013 to October 2016. This framework lays out a hybrid multi-curve interest rate model in that risk components associated with roll-over risk are modelled explicitly, that is, credit and funding liquidity risk, thereby creating a link between London Interbank Offered Rates (LIBORs) of different tenors resulting in only a parsimonious number of curves. The model framework exploits affine properties of the Cox-Ingersoll-Ross (CIR) process in deriving closed-form expressions for discount factors, the spot LIBOR and swap payment streams.
Using these closed-form expressions, a model is calibrated for 10 different specifications of the underlying CIR process, considering both 1-factor and 3-factor model effects alongside the effects of priori specified volatilities. It is shown that only discrepancies occur in the short end and when a high a priori volatility is specified in a 1-factor setup.
Vanilla and basis swap exposure profiles are generated from two of the calibrated interest rate models, revealing a sensitivity of the exposure profiles to the choice of model. In particular the underlying volatility affects the shape of these profiles through a diffusion effect. Again small irregularities are present in the short end. Finally, introducing a push to the discount curve is shown to have a very limited effect on the swap exposure.
Vejleder: David G. Skovmand
Censor: Bjarne Astrup Jensen, CBS