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Gábor Vígh

completed his Master’s focusing on Mathematical finance at Corvinus University of Budapest. In 2014, he joined to Morgan Stanley where he is heading the Counterparty Exposure Modelling group. Prior to Morgan Stanley, he worked for MKB in the Credit Risk Methodology Group. He also holds a bachelor degree in Software Engineering from ELTE.

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Dora Bagyinszki, Gabor Vigh, Norbert Hari: The impact of stochastic LIBOR-OIS basis on counterparty risk

Before the onset of the credit crunch in 2007, the difference between London Interbank Offered Rate (LIBOR) and the Overnight Indexed Swap Rate (OIS) was negligible. In the crisis the spreads between the two rates suddenly started to widen due to material credit and risk premium incorporated in the LIBOR rate and since then it has been evolving randomly. Prices of instruments linked LIBOR rates started to reflect stochastic spreads, a new risk factor emerged. The disconnect between the two rates required the industry to revise the modeling assumptions, pricing formulas and hedging strategies.
 This research investigates the impact of the stochastic LIBOR-OIS spreads on future counterparty exposure distributions by comparing the results obtained from a stochastic spread model to the industry wide deterministic spread assumption. We considered the stochastic basis model proposed by Mercurio and Li (2016) with basis and OIS dynamics using the extended Vasicek model. The model is calibrated to two distinct historical basis time series: i.) to the financial crisis period and ii.) to a more recent and stable period. The analysis focuses on a single tenor, on a single currency and a Forward Rate Agreement.

Last modified: 2018.11.30.