Macrina, A;
Obeid, M;
(2021)
Term Risk in Interest Rate Markets.
SSRN: Cold Spring Harbor, NY, USA.
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Abstract
Using a stylised financial system along with a systemic perspective thereof, the definition of an aggregated banking system that is default-free but vulnerable to liquidity risks is enabled. Within this setup, a consistent mathematical modelling framework for term interest rate systems is derived that enables the pricing and valuation of associated linear derivative instruments. It is then demonstrated that term rates may not be synthetically replicated, in general, which in turn enables the extraction and explanation of the genesis of term risk. These findings provide: (i) a rigorous understanding of the incomplete market paradigm that encapsulates inter-bank term rates and the risk management processes involved therein; and (ii) quantitative theoretical evidence against global interest rate reform proposals advocating for the replacement of term Libor (London inter-bank offered rate) reference rates with overnight rate-based alternatives.
| Type: | Working / discussion paper |
|---|---|
| Title: | Term Risk in Interest Rate Markets |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.2139/ssrn.3962993 |
| Publisher version: | https://dx.doi.org/10.2139/ssrn.3962993 |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Term rates, Inter-bank market, Money market, Interest rate derivatives, Pricing kernel approach, Liquidity risk, OIS and LIBOR, Multi-curve term structures, LIBOR transition, Benchmark reform |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10129092 |
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