Dear colleagues,

you are all invited to participate in the following seminar organized by QFinLab – Department of Mathematics, Politecnico di Milano.

Wednesday, 19 February 2025, 12.15-13.15

Seminar room, third floor, building 14, Via Bonardi 9, Milano (Leonardo Campus)

Marzia De Donno (Università Cattolica del Sacro Cuore)

Title: Short rate models with stochastic discontinuities: a PDE approach.

Abstract: With the recent reform of interest rate benchmarks, interbank offered rates (IBORs) like LIBOR have been replaced by risk-free rates (RFRs), such as the Secured Overnight Financing Rate (SOFR) in the U.S. and the Euro Short-Term Rate (€STR) in Europe. These rates exhibit characteristics like jumps and spikes that correspond to specific market events, driven by regulatory and liquidity constraints. To capture these characteristics, this paper considers a general short-rate model that incorporates discontinuities at fixed times with random sizes. Within this framework, we introduce a PDE-based approach for pricing interest rate derivatives. For affine models, we derive (quasi) closed-form solutions, while for the general case, we develop numerical methods to solve the resulting PDEs.

(Joint work with A. Calvia, C. Guardasoni, S. Sanfelici).

Next seminar: Katia Colaneri (Università di Roma Tor Vergata), 5 March 12.00.

All news can be found on the QFinLab webpage.

The organizers: Michele Azzone and Alessandro Calvia