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A Note on Dual-Curve Construction: Mr. Crab's Bootstrap

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  • Roberto Baviera
  • Alessandro Cassaro

Abstract

Observe crabs in the sand of our beaches: they move forward, backward and then forward again. Before the crisis, the standard bootstrap of interest rate curves was a 'Forward'-looking iterative algorithm where only information from previous knots was used to find discounts at subsequent dates.In this note we describe a new bootstrapping technique that involves various 'Backward' steps, which are reminiscent of a crab's steps: this new methodology coherently considers now standard dual-curve framework. Two other major results emerge from the bootstrap methodology described: (i) discounts are independent from the chosen interpolation rule for all practical purposes; and (ii) convexity adjustments to Short-Term Interest Rate futures can be dealt with using a methodology in line with market practice.

Suggested Citation

  • Roberto Baviera & Alessandro Cassaro, 2015. "A Note on Dual-Curve Construction: Mr. Crab's Bootstrap," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(2), pages 105-132, April.
    • Handle: RePEc:taf:apmtfi:v:22:y:2015:i:2:p:105-132
    DOI: 10.1080/1350486X.2014.959665
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    Cited by:

    1. Roberto Baviera, 2017. "Back-of-the-envelope swaptions in a very parsimonious multicurve interest rate model," Papers 1712.06466, arXiv.org.
    2. Roberto Baviera & Gaetano La Bua & Paolo Pellicioli, 2016. "A note on CVA and wrong way risk," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-14, June.
    3. Roberto Baviera, 2019. "Back-Of-The-Envelope Swaptions In A Very Parsimonious Multi-Curve Interest Rate Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(05), pages 1-24, August.
    4. Lin-Yee Hin & Nikolai Dokuchaev, 2016. "Short Rate Forecasting Based On The Inference From The Cir Model For Multiple Yield Curve Dynamics," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-33, March.

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