Advances in Tenor Basis Modeling: Boundedness, Specification & Calibration

The behavior of tenor basis spreads is of crucial importance to CVA for tenor basis swaps. A pervasive feature of such spreads is that they are typically positive, suggesting a natural lower bound.

On Thursday, October 10th at 10:00am EDT, Numerix Director of Quantitative Research, Andrew McClelland Ph.D., presented new research. He introduced a lower-bounded multi-curve Cheyette model, with lower bounds owing to level dependence in spread volatilities and derives swaption pricing formulae and other quantities relevant for practical use. Issues arising out of the calibration of multi-curve models were discussed and a calibration strategy was formalized.

Dr. McClelland covered:

  • Tenor basis in XVA and its impact on calibrated discount-rate volatilities
  • A Cheyette-style multi-curve model with lower-bounded tenor spreads
  • A complicated HJM-style drift condition on the multi-curve model
  • Calibrating to historical basis-spread behavior (jointly with swaptions)
  • The impact of benchmark rate reforms on multi-curve modeling and calibration

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