Risk-free rates (RFRs) play a central role in the reform of interest rate benchmarks. We study a model for RFRs driven by a general affine process. In this context, under minimal assumptions, we derive explicit valuation formulas for forward-looking and backward-looking caplets/floorlets,...

This paper introduces a highly analytically tractable parametric model for modelling interest-rate tick movements and arbitrage-free pricing interest-rate options. We apply it to loan prime rates (LPR), the foremost benchmark interest rates that matter to almost all businesses and households in...

We show theoretically and empirically that the dollar’s status as the global reserve currency can lead to economically significant changes in U.S. money market liquidity. We develop a model in which U.S. money market spreads respond to foreign central banks’ exchange-rate management...

We propose a class of time-separable and state-dependent preferences for asset pricing. In conjunction with the affine structure of the joint dynamics of state variables, aggregate consumption and dividend, an equilibrium model with these preferences yields closed-form solutions of bonds and...

The effects of credit and monetary policy shocks at the lower bound are analysed using a shadow rate term structure model of the Euro-Dollar interest rate futures and Treasury bond markets. This model uses three factors that are common to both markets and two spread factors that capture the term...

We revisit the problem of pricing and hedging plain vanilla single-currency interest rate derivatives using multiple distinct yield curves for market coherent estimation of discount factors and forward rates with dierent underlying rate tenors. Within such double-curve-single-currency framework,...

We propose a new model for pricing of bonds and their options based on the short rate when the latter exhibits a step function like behaviour. The model produces realistic looking spot rate curves, and allows one to derive explicit formulae for the yield curve and put and cap options. This model...

We consider a diffusion type model for the short rate, where the drift and diffusion parameters are modulated by an underlying Markov process. The underlying Markov process is assumed to have a stochastic differential driven by Wiener processes and a marked point process. The model for the short...

The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the `natural'' hedging instruments are particularly robust. This is true for all models that imply...

The market model of interest rates specifies simple forward or Libor rates as lognormally distributed, their stochastic dynamics has a linear volatility function. In this paper, the model is extended to quadratic volatility functions which are the product of a quadratic polynomial and a...