Modelling stochastic multi-curve basis

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dc.contributor.advisorKienitz, Jörgen_ZA
dc.contributor.advisorMcWalter, Thomasen_ZA
dc.contributor.authorDalton, Rowanen_ZA
dc.date.accessioned2018-01-30T10:26:26Z
dc.date.available2018-01-30T10:26:26Z
dc.date.issued2017en_ZA
dc.description.abstractAs a consequence of the 2007 financial crisis, the market has shifted towards a multi-curve approach in modelling the prevailing interest rate environment. Currently, there is a reliance on the assumption of deterministic- or constant-basis spreads. This assumption is too simplistic to describe the modern multi-curve environment and serves as the motivation for this work. A stochastic-basis framework, presented by Mercurio and Xie (2012), with one- and two-factor OIS short-rate models is reviewed and implemented in order to analyse the effect of the inclusion of stochastic-basis in the pricing of interest rate derivatives. In order to preclude the existence of negative spreads in the model, a constraint on the spread model parameters is necessary. The inclusion of stochastic-basis results in a clear shift in the terminal distributions of FRA and swap rates. In spite of this, stochastic-basis is found to have a negligible effect on cap/floor and swaption prices for the admissible spread model parameters. To overcome challenges surrounding parameter estimation under the framework, a rudimentary calibration procedure is developed, where the spread model parameters are estimated from historical data; and the OIS rate model parameters are calibrated to a market swaption volatility surface.en_ZA
dc.identifier.apacitationDalton, R. (2017). <i>Modelling stochastic multi-curve basis</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/27102en_ZA
dc.identifier.chicagocitationDalton, Rowan. <i>"Modelling stochastic multi-curve basis."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2017. http://hdl.handle.net/11427/27102en_ZA
dc.identifier.citationDalton, R. 2017. Modelling stochastic multi-curve basis. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Dalton, Rowan AB - As a consequence of the 2007 financial crisis, the market has shifted towards a multi-curve approach in modelling the prevailing interest rate environment. Currently, there is a reliance on the assumption of deterministic- or constant-basis spreads. This assumption is too simplistic to describe the modern multi-curve environment and serves as the motivation for this work. A stochastic-basis framework, presented by Mercurio and Xie (2012), with one- and two-factor OIS short-rate models is reviewed and implemented in order to analyse the effect of the inclusion of stochastic-basis in the pricing of interest rate derivatives. In order to preclude the existence of negative spreads in the model, a constraint on the spread model parameters is necessary. The inclusion of stochastic-basis results in a clear shift in the terminal distributions of FRA and swap rates. In spite of this, stochastic-basis is found to have a negligible effect on cap/floor and swaption prices for the admissible spread model parameters. To overcome challenges surrounding parameter estimation under the framework, a rudimentary calibration procedure is developed, where the spread model parameters are estimated from historical data; and the OIS rate model parameters are calibrated to a market swaption volatility surface. DA - 2017 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2017 T1 - Modelling stochastic multi-curve basis TI - Modelling stochastic multi-curve basis UR - http://hdl.handle.net/11427/27102 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/27102
dc.identifier.vancouvercitationDalton R. Modelling stochastic multi-curve basis. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2017 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/27102en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleModelling stochastic multi-curve basisen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMPhilen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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