A multiple-curve Lévy forward rate model in a two-price economy

An advanced Heath-Jarrow-Morton (HJM) forward rate model driven by time-inhomogeneous Lévy processes is presented which is able to handle the recent development to multiple curves and negative interest rates. It is also able... [ view full abstract ]

An advanced Heath-Jarrow-Morton (HJM) forward rate model driven by time-inhomogeneous Lévy processes is presented which is able to handle the recent development to multiple curves and negative interest rates. It is also able to exploit bid and ask price data. Valuation formulas for standard interest rate derivatives such as caps, floors, swaptions and digital options are established. These formulas can numerically be evaluated very fast by using Fourier based valuation methods. Calibration results are presented based on data from September 2013 and September 2016. The latter is of particular interest since rates were deep in negative territory at that time.