Yield Curve Modeling
This book will give the reader insight into how to model yield curves in our incomplete and imperfect financial markets. An extensive list of yield curve models are shown and discussed. Using actual market instruments, these models are then applied and th
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Yolanda S. Stander
YIELD CURVE MODELING
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Yield Curve Modeling
YO L A N D A S . S TA N D E R
© Yolanda S. Stander 2005 Softcover reprint of the hardcover 1st edition 2005 978-1-4039-4726-0 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries.
ISBN 978-1-349-52428-0 ISBN 978-0-230-51374-7 (eBook) DOI 10.1057/9780230513747 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 09 08 07 06 05
Special thanks to my partner, Rudi van der Linde, who was the first person to read this book. It would not be possible without his help and support. I would also like to mention two extraordinary people who taught me a lot about risk management: Jurie Bester and Satyajit Das.
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Contents List of figures List of tables
ix xiii
1 Introduction 1.1 Yield curve background 1.2 Main approaches to modeling yield curves 1.3 The layout of the book
1 2 3 5
2 Concepts and terminology 2.1 Zero interest rates 2.2 Discount factors 2.3 Forward rates 2.4 Yield to maturity 2.5 Par rates 2.6 The “bootstrapping” technique 2.7 Implied interest rates 2.8 Concluding remarks
8 9 12 13 16 16 21 28 32
3 Yield curve models 3.1 Regression-type models 3.2 Empirical yield curve models 3.3 Equilibrium models
33 33 40 49
4 Practical issues 4.1 Overview 4.2 Daycount conventions 4.3 Instrument quoting convention 4.4 Holidays and weekends 4.5 Business day rules 4.6. Credit quality of the instruments 4.7 Liquidity of the instruments 4.8 Subsystem requirements
53 53 53 56 56 57 59 61 62 vii
viii
CONTENTS
4.9 Interpolation techniques 4.10 Extrapolation techniques 4.11 Concluding remarks
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