David Glavind Skovmand

Modelling the risk that a financial institution may not be able to roll over its debt at the market reference rate, the so--called ``roll--over risk'', we construct a model framework for the dynamics of reference term rates (e.g., LIBOR) and their spread vis-a-vis benchmarks based on overnight reference rates, e.g., rates implied by overnight index swaps (OIS). In this framework, different interest rate term structures are  endogenously generated for each tenor, that is, a different term structure for each choice of the length of the interest rate accrual period, be it overnight (e.g., OIS), three--month LIBOR, six--month LIBOR, etc. A concrete model instance in this framework can be calibrated simultaneously to available market instruments at a particular point in time, but more importantly, we explicitly obtain dynamics of term rates such as LIBOR. Thus models in our framework are amenable to econometric estimation. For a model class based on affine dynamics, we conduct an empirical analysis on EUR data for OIS, interest--rate swaps, basis swaps and credit default swaps.