What Interest Rate Models to Use? Buy Side Versus Sell Side

Nawalkha, Sanjay K.; Rebonato, Riccardo

doi:10.2139/ssrn.1723924

Cited by 10 publications

(3 citation statements)

References 32 publications

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“…We calculate RAY assuming 5,000 simulations with current refundings executed based on the opportunity index criteria used by many governments. Given issuers are essentially holding unhedged call options embedded in their bonds, it is appropriate to use a real‐world market model for yield curve simulations since standard bond option “pricing” models would not be appropriate in this setting (Nawalkha and Rebonato 2011). This model is particularly well suited to municipal call options/refunding analysis because it allows us to capture the dynamics of both the tax‐exempt borrower's and taxable escrow markets simultaneously.…”

Section: Methodsmentioning

confidence: 99%

Direct Versus Indirect Federal Bond Subsidies: New Evidence on Cost of Capital

Luby¹,

Orr²,

Ryffel³

2020

Public Budgeting & Finance

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The longstanding debate surrounding the most effective way for the U.S. federal government to subsidize state and local government capital‐raising received renewed attention in recent years due to the passage and subsequent expiration of the taxable Build America Bond (BAB) program. Recent academic studies, as well as reports from the U.S. Treasury Department, claim that the direct subsidy approach as evidenced by the BAB program provides greater bond borrowing cost benefits to state and local governments compared to traditional tax‐exempt bonds. This research investigates the extent to which such borrowing cost benefits may be overstated since it appears previous studies did not adequately account for the early call optionality of tax‐exempt bonds.

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Section: Methodsmentioning

confidence: 99%

Direct Versus Indirect Federal Bond Subsidies: New Evidence on Cost of Capital

Luby¹,

Orr²,

Ryffel³

2020

Public Budgeting & Finance

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“…In Table 6 the exact IRS values change for the different calibrations are displayed in the third and fourth columns. They are obtained by computing S t (·) − S 0 according to (17), and where S t is obtained from the definition of IRS value as in (16).…”

Section: • Numerical Illustrations For Irsmentioning

confidence: 99%

Sensitivities of Interest Rate Swaps Under the G2++ Model

Jaffal¹,

Rakotondratsimba²

2017

Int. J. of Appl. Math.

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The two-additive-factor Gaussian model G2++ (which encompasses the famous two-factor Hull-White model) is a stochastic model which describes the instantaneous short rate dynamic. It has functional qualities required in various practical purposes as in Asset Liability Management and in Trading of interest rate derivatives.Recently we derived analytic expressions for the price sensitivities of zerocoupon bonds, coupon-bearing bonds and the portfolio with respect to the shocks linked to the unobservable two-uncertainty factors underlying the G2++ model.Interest Rate Swaps (IRS) are instruments largely used by market participants for many purposes. It appears that sounding analyzes related to the hedging of portfolios made by swaps is not clear in the financial literature.Our main goal here is to provide analytic expressions for the price sensitivities for the IRS with respect to the G2++ model of the interest rate. Our present results might provide a support for practitioners, using portfolio of swaps in their hedge decision-making.

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“…Even if the market is quoting unreasonable prices, the trader has to find the parameters that replicate those prices. As explained by Nawalkha and Rebonato (2011), traders need to achieve static consistency in order to provide at each given point in time arbitrage-free prices or to hedge a derivatives portfolio. Conversely, our model is calibrated following a dynamic approach, in order to analyze the behavior of yield curves over time.…”

Section: Introductionmentioning

confidence: 99%

Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs

Bianchi

2020

Communications in Statistics - Simulation and Computation

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In this paper, we empirically study models for pricing Italian sovereign bonds under a reduced form framework, by assuming different dynamics for the short-rate process. We analyze classical Cox-Ingersoll-Ross and Vasicek multifactor models, with a focus on optimization algorithms applied in the calibration exercise. The Kalman filter algorithm together with a maximum likelihood estimation method are considered to fit the Italian term-structure over a 12-year horizon, including the global financial crisis and the euro area sovereign debt crisis. Analytic formulas for the gradient vector and the Hessian matrix of the likelihood function are provided.

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What Interest Rate Models to Use? Buy Side Versus Sell Side

Cited by 10 publications

References 32 publications

Direct Versus Indirect Federal Bond Subsidies: New Evidence on Cost of Capital

Direct Versus Indirect Federal Bond Subsidies: New Evidence on Cost of Capital

Sensitivities of Interest Rate Swaps Under the G2++ Model

Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs

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