Consistent Valuation Across Curves using Pricing Kernels

The general problem of valuation when discount rates differ from an asset's cash flow accrual rate is considered. A pricing kernel framework models an economy segmented into distinct markets, identified by a yield curve having... [ view full abstract ]

The general problem of valuation when discount rates differ from an asset's cash flow accrual rate is considered. A pricing kernel framework models an economy segmented into distinct markets, identified by a yield curve having its own risk characteristics. A curve-conversion factor links all markets in an arbitrage-free manner and an across-curve pricing formula is derived. A multi-curve framework is formulated for emerging and developed markets, highlighting an important dual feature of the conversion process. Existing approaches based on HJM and rational pricing kernel models are recovered, reviewed and extended. FX, inflation-linked and hybrid securities thereof are also valued consistently.