Teichmann, Josef; Matematični kolokvij december 2013

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When roll-overs do not qualify as numéraire: bond markets beyond short rate paradigms

Josef Teichmann

ETH, Zurich

5. december 2013


We investigate default-free bond markets where the standard relationship between a possibly existing bank account process and the term structure of bond prices is broken, i.e., the bank account process is not a valid numéraire. We argue that this feature is not the exception but rather the rule in bond markets when starting with, e.g., terminal bonds as numéraires. If we can construct a bank account process through roll-overs, we can relate the impossibility of taking the bank account as numéraire to liquidity effects. Here we enter endogenously the arena of multiple yield curves. The theory is illustrated by several examples.


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