Next Article in Journal
A Generalized Measure for the Optimal Portfolio Selection Problem and its Explicit Solution
Previous Article in Journal
Lambda Value at Risk and Regulatory Capital: A Dynamic Approach to Tail Risk
Article Menu
Issue 1 (March) cover image

Export Article

Open AccessArticle
Risks 2018, 6(1), 18; https://doi.org/10.3390/risks6010018

Consistent Valuation Across Curves Using Pricing Kernels

1
Department of Mathematics, University College London, London WC1E 6BT, UK
2
Department of Actuarial Science, University of Cape Town, Rondebosch 7701, South Africa
3
African Institute of Financial Markets and Risk Management, University of Cape Town, Rondebosch 7701, South Africa
*
Author to whom correspondence should be addressed.
Received: 15 January 2018 / Revised: 19 February 2018 / Accepted: 22 February 2018 / Published: 6 March 2018
Full-Text   |   PDF [527 KB, uploaded 14 March 2018]

Abstract

The general problem of asset pricing when the discount rate differs from the rate at which an asset’s cash flows accrue is considered. A pricing kernel framework is used to model an economy that is segmented into distinct markets, each identified by a yield curve having its own market, credit and liquidity risk characteristics. The proposed framework precludes arbitrage within each market, while the definition of a curve-conversion factor process links all markets in a consistent arbitrage-free manner. A pricing formula is then derived, referred to as the across-curve pricing formula, which enables consistent valuation and hedging of financial instruments across curves (and markets). As a natural application, a consistent multi-curve framework is formulated for emerging and developed inter-bank swap markets, which highlights an important dual feature of the curve-conversion factor process. Given this multi-curve framework, existing multi-curve approaches based on HJM and rational pricing kernel models are recovered, reviewed and generalised and single-curve models extended. In another application, inflation-linked, currency-based and fixed-income hybrid securities are shown to be consistently valued using the across-curve valuation method. View Full-Text
Keywords: pricing kernel approach; rational pricing models; multi-curve term structures; OIS and LIBOR; spread models; HJM; multi-curve potential model; linear-rational term structure models; inflation-linked and foreign-exchanged securities; valuation in emerging markets pricing kernel approach; rational pricing models; multi-curve term structures; OIS and LIBOR; spread models; HJM; multi-curve potential model; linear-rational term structure models; inflation-linked and foreign-exchanged securities; valuation in emerging markets
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
SciFeed

Share & Cite This Article

MDPI and ACS Style

Macrina, A.; Mahomed, O. Consistent Valuation Across Curves Using Pricing Kernels. Risks 2018, 6, 18.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics

1

Comments

[Return to top]
Risks EISSN 2227-9091 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top