A Consistent Stochastic Model of the Term Structure of Interest Rates for Multiple Tenors

We construct a stochastic model framework for the term structure of interest rates in which a frequency basis  arises endogenously. This roll-over risk consists of two components, a credit risk component due to the... [ view full abstract ]

We construct a stochastic model framework for the term structure of interest rates in which a frequency basis  arises endogenously. This roll-over risk consists of two components, a credit risk component due to the possibility of being downgraded and thus facing a higher credit spread when attempting to roll over short--term borrowing, and a component reflecting the (systemic) possibility of being unable to roll over short--term borrowing at the reference rate (e.g., LIBOR) due to an absence of liquidity in the market.