scholarly journals Brazilian term structure of interest rate modeling: A Nelson-Siegel approach

2016 ◽  
Vol 14 (1) ◽  
pp. 414-432
Author(s):  
Adalto Barbaceia Gonçalves ◽  
Felipe Tumenas Marques
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Future Research ◽  
Model Parameters ◽  
Extensive Literature ◽  
Bond Markets ◽  
Fixed Rate ◽  
Yield Curves ◽  
Vec Model ◽  
Parsimonious Models

Forecasting interest rates structures plays a fundamental role in the fixed income and bond markets. The development of dynamic modeling, especially after Nelson and Siegel (1987) work, parsimonious models based in a few parameter shed light over a new path for the market players. Despite the extensive literature on the term structure of interest rates modeling and the existence in the Brazilian market of various yield curves from different traded asset classes, the literature focused only in the fixed rate curve. In this work we expand the existing literature on modeling the term structure of Brazilian interest rates evaluating all the yield curves of Brazilian market using the methodology proposed by Nelson and Siegel. We use Non Linear Least Squares (NLLS) to estimate the model parameters for almost 10 years of monthly data and model these parameters with the traditional VAR/VEC model. The results show that it is possible to estimate the Nelson Siegel model for the Brazilian curves. It remains for future research the modeling of their variances as well as the possibility to develop a global Brazilian model using Kalman Filter using the Diebold. Li. and Yue (2006) approach.

Yield Curves, Swap Curves, and Term Structure of Interest Rates

2019 ◽  
pp. 203-228
Author(s):  
Tom P. Davis ◽  
Dmitri Mossessian
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Yield Curves ◽  
No Arbitrage ◽  
Interest Rate Swap ◽  
The Interest Rate ◽  
Rate Swap ◽  
The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

Corporate Bond Markets

2019 ◽  
pp. 113-130
Author(s):  
Kelly E. Carter
Keyword(s):  
Interest Rates ◽  
Credit Ratings ◽  
Corporate Bonds ◽  
Corporate Bond ◽  
Bond Markets ◽  
Bond Prices ◽  
Wall Street ◽  
Yield Curves ◽  
Bond Portfolios ◽  
The Impact

This chapter covers the fundamentals of corporate bond markets. It begins by highlighting the size and importance of these markets, followed by a discussion of the major types of corporate bonds and the process of issuing bonds. Next, the chapter provides a discussion of important relationships between a bond’s price and market interest rates, including the key observation that bond prices move opposite market interest rates. The next topic focuses on duration and convexity, which are techniques to estimate the dollar and percent changes in bond prices for a given change in market interest rates, followed by a discussion of bond immunization, which is a technique used to protect the value of bond portfolios from adverse changes in market interest rates. The final topics covered concern yield curves, credit ratings, and the impact of the Dodd-Frank Wall Street Reform Act of 2010 on corporate bond markets.

scholarly journals Social Security Benefit Valuation, Risk, and Optimal Retirement

Risks ◽  
2019 ◽  
Vol 7 (4) ◽  
pp. 124
Author(s):  
Yassmin Ali ◽  
Ming Fang ◽  
Pablo A. Arrutia Sota ◽  
Stephen Taylor ◽  
Xun Wang
Keyword(s):  
Social Security ◽  
Interest Rates ◽  
Term Structure ◽  
Principal Component ◽  
Disease Diagnosis ◽  
Cash Flows ◽  
Future Research ◽  
Demographic Groups ◽  
Numerical Studies ◽  
Future Research Directions

We develop valuation and risk techniques for the future benefits of a retiree who participates in the American Social Security program based on their chosen date of retirement, the term structure of interest rates, and forecasted life expectancy. These valuation methods are then used to determine the optimal retirement time of a beneficiary given a specific wage history and health profile in the sense of maximizing the present value of cash flows received during retirement years. We then examine how a number of risk factors including interest rates, disease diagnosis, and mortality risks impact benefit value. Specifically, we utilize principal component analysis in order to assess both interest rate and mortality risk. We then conduct numerical studies to examine how such risks range over distinct income and demographic groups and finally summarize future research directions.

scholarly journals Forecasting Term Structure of Interest Rates in Japan

2019 ◽  
Vol 7 (3) ◽  
pp. 39 ◽  
Author(s):  
Ishii
Keyword(s):  
Financial Crisis ◽  
Interest Rates ◽  
Term Structure ◽  
Bond Markets ◽  
Forecast Horizon ◽  
Forecast Performance ◽  
Crisis Period ◽  
Long Period ◽  
The U.S ◽  
Dns Model

In this paper, we examined and compared the forecast performances of the dynamic Nelson–Siegel (DNS), dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models after the financial crisis period. The best model for the forecast performance is the DNSS model in the middle and long periods. The AFNS is inferior to the DNS model for long-period forecasting. In U.S. bond markets, AFNS is shown to be superior to DNS in the U.S. However, for Japanese data, there is no evidence that the AFNS is superior to the DNS model in the long forecast horizon.

scholarly journals A Nonparametric Approach to Bond Portfolio Immunization

Mathematics ◽  
2019 ◽  
Vol 7 (11) ◽  
pp. 1121
Author(s):  
Victor Lapshin
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Best Practice ◽  
Yield Curve ◽  
Model Parameters ◽  
Dimensional Manifold ◽  
Nonparametric Approach ◽  
Hedging Portfolio ◽  
Practice Approach ◽  
Low Dimensional

We consider the problem of short term immunization of a bond-like obligation with respect to changes in interest rates using a portfolio of bonds. In the case that the zero-coupon yield curve belongs to a fixed low-dimensional manifold, the problem is widely known as parametric immunization. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to all model parameters equal to zero. However, within a popular approach of nonparametric (smoothing spline) term structure estimation, parametric hedging is not applicable right away. We present a nonparametric approach to hedging a bond-like obligation allowing for a general form of the term structure estimator with possible smoothing. We show that our approach yields the standard duration based immunization in the limit when the amount of smoothing goes to infinity. We also recover the industry best practice approach of hedging based on key rate durations as another particular case. The hedging portfolio is straightforward to calculate using only basic linear algebra operations.

Term Structure of Interest Rates with B-Spline Model during the Money-Shortage-Event in China

2014 ◽  
Vol 989-994 ◽  
pp. 5634-5637
Author(s):  
Peng Zheng ◽  
Lian Qiang Yang ◽  
Zhen Ni Dai
Keyword(s):  
Structural Change ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curves ◽  
B Spline ◽  
Parametric Test ◽  
B Splines ◽  
Price Data ◽  
Significant Structural Change ◽  
Total Test

Using the price data of bonds’ transactions during June 2013, the discounting function is fitted by non-uniform cubic B-Splines and yield curves are modeled. Models’ single parametric test and total test are both significant. Furthermore, the structural change’s test shows that there is no significant structural change between adjacent transaction days, which means that the bonds’ market is relatively steady during June 2013.

ARBITRAGE SMOOTHING IN FITTING A SEQUENCE OF YIELD CURVES

2009 ◽  
Vol 12 (05) ◽  
pp. 577-588 ◽  
Author(s):  
PAUL A. BEKKER ◽  
KEES E. BOUWMAN
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Empirical Modeling ◽  
Yield Curves ◽  
Parameter Stability ◽  
The Family ◽  
The Us ◽  
Parsimonious Models ◽  
Absence Of Arbitrage

Empirical modeling of the yield curve is often inconsistent with absence of arbitrage. In fact, many parsimonious models, like the popular Nelson-Siegel model, are inconsistent with absence of arbitrage. In other cases, arbitrage-free models are often used in inconsistent ways by recalibrating parameters that are assumed constant. For these cases, this paper introduces an arbitrage smoothing device to control arbitrage errors that arise in fitting a sequence of yield curves. The device is applied to the US term structure for the family of Nelson-Siegel curves. It is shown that the arbitrage smoothing device contributes to parameter stability and smoothness.

scholarly journals Title: analysis of term structure of interest rates in Latin America countries from 2006 to 2014

2015 ◽  
Vol 13 (4) ◽  
pp. 650
Author(s):  
Felipe Stona ◽  
Jean Amann ◽  
Maurício Delago Morais ◽  
Divanildo Triches ◽  
Igor Clemente Morais
Keyword(s):  
Latin America ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Principal Component ◽  
Vector Model ◽  
Yield Curves ◽  
Macroeconomic Factors ◽  
The Relationship ◽  
Latin America Countries

This article aims to investigate the relationship between the term structure of interest rates and macroeconomic factors in selected countries of Latin America, such as Brazil, Chile and Mexico, between 2006 and 2014, on an autoregressive vector model. Specifically, we perform estimations of Nelson-Siegel, Diabold-Li and principal component analysis to test how the change of macroeconomic factors, e.g. inflation, production and unemployment levels affect the yield curves. For Brazil and Mexico, GDP and inflation variables are relevant to change the yield curves, with the former shifting more the level, and the latter with greater influence on the slope. For Chile, inflation had the greatest impact on the level and, specifically for Mexico, the unemployment variable also changed the slope of the yield curve.

Bayesian smoothing spline models and their application in estimating yield curves

2015 ◽  
Author(s):  
◽  
Xiaojun Tong
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Smoothing Spline ◽  
Calendar Time ◽  
Yield Data ◽  
Yield Curves ◽  
Adaptive Smoothing ◽  
Spline Models ◽  
Bayesian Smoothing

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] The term structure of interest rates, also called the yield curve, is the series of interest rates ordered by term to maturity at a given time. The smoothing spline as a nonparametric regression method has been used widely for fitting a smooth curve due to its flexibility and smoothing properties. In this dissertation, a class of Bayesian smoothing spline models is developed for the yield curve estimation under different scenarios. These include the Bayesian smoothing spline model for estimating the Treasury yield curves, the Bayesian multivariate smoothing spline model for estimating multiple yield curves jointly, the Bayesian adaptive smoothing spline model for dealing with the yield data in which the smoothness varies significantly, the Bayesian smoothing spline model for extracting the zero-coupon yield curve from coupon bond prices, and the Bayesian thin-plate splines for modeling the yield curves on both the calendar time and the maturity. In addition, the Bayesian model selection in the smoothing spline models is developed to test the nonlinearity of the yield curves.

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