Convexity adjustment for constant maturity swaps in a multi-curve framework

Karouzakis, Nikolaos, Hatgioannides, John and Andriosopoulos, Kostas (2017) Convexity adjustment for constant maturity swaps in a multi-curve framework. Annals of Operations Research. ISSN 0254-5330

[img] PDF - Published Version
Available under License Creative Commons Attribution.

Download (1MB)

Abstract

In this paper we propose a double curving setup with distinct forward and discount curves to price Constant Maturity Swaps (CMS). Using separate curves for discounting and forwarding, we develop a new convexity adjustment, by departing from the restrictive assumption of a flat term structure, and expand our setting to incorporate the more realistic and even challenging case of term structure tilts. We calibrate CMS spreads to market data and numerically compare our adjustments against the Black and SABR (Stochastic Alpha Beta Rho) CMS adjustments widely used in the market. Our analysis suggests that the proposed convexity adjustment is significantly larger compared to the Black and SABR adjustments and offers a consistent and robust valuation of CMS spreads across different market conditions.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
Depositing User: Nikolaos Karouzakis
Date Deposited: 19 Apr 2017 08:37
Last Modified: 19 May 2017 12:20
URI: http://sro.sussex.ac.uk/id/eprint/67424

View download statistics for this item

📧 Request an update