Stochastic multi-curve interest rate models

Details

Supervisors

Pierre Devolder

Faculty

Louvain School of Management

Degree label

Master [60] en sciences de gestion (horaire décalé)

Abstract

This thesis gives a review of the changes that occurred in the interest rate derivatives market after the 2007-2008 global financial crisis. This work introduces the topic with a macroscopic point of view and in a way that is understandable by non-expert readers. Then, the fact that, following this event, credit and liquidity risks could no longer be neglected is explained, as well as the resulting changes in the method to use when pricing interest rate derivatives. In particular, the focus is on how a sudden increase in the spread of interest rates that was negligible before the crisis created the need to switch from a single-curve framework to a multi-curve framework. Some formal mathematical definitions are given and explained, the new method is described and the pricing equations are established. Finally, a simple illustration of the pricing procedure for an interest rate swap is given and, to go further, the link with low or negative interest rates is made.