Post Crisis Financial Modelling – What changes?


I recently stumbled upon an interesting book about post-crisis interest-rate modelling. Besides future changes in the LIBOR and possible EURIBOR fixing after the manipulations of the past few years, counter-party default and collateral become important.

Changes in Interest-Rate and Credit Instrument Pricing

Pre-crisis, there was a risk-free rate on which the market agreed. This way, different banks could create interest-rate swap transactions using basically the same conditions with different counter parties. This also meant that one could price the different instruments with the same discount curve.

Now, this risk-free rate has disappeared. The market has created a new view on credit risk. This view requires that collateral is set aside for transactions which were seen as risk-free before the crisis. A more detailed credit default modelling is also required – which is non-trivial. It seems that there is no established market standard for pricing the instruments consistently, yet. Chris Kenyon and Roland Stamm propose such a framework in their new book:

Chris Kanyon and Roland Stamm: “Discounting, LIBOR, CVA and Funding: Interest Rate and Credit Pricing (Applied Quantitative Finance).” See at


The presented framework is quite complex. It involves several additional parameter curves. For me, the effort seems to be too much for most cases. But, it is a great starting point for a new pricing framework to evolve.

A presentation with some of the insights is available at PRMIA:  Presentation: Discounting and Curve Construction Since the Beginning of Financial Crisis 2007


It is interesting to see that pre-crisis, the pricing challenge lay in the complexity of the products. Post-Crisis, the challenge is already pricing simple products.

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