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Stripping the Swiss Discount Curve

Author

Listed:
  • Nicolas Camenzind

    (École Polytechnique Fédérale de Lausanne)

  • Damir Filipović

    (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

Abstract

We analyze and implement the kernel ridge regression (KR) method developed in [FPY22] to estimate the risk-free discount curve for the Swiss government bond market. We show that the insurance industry standard Smith–Wilson method is a special case of the KR framework. We recapitulate the curve estimation methods of the Swiss Solvency Test (SST) and the Swiss National Bank (SNB). In an extensive empirical study covering the years 2010 to 2022 we compare the KR curves with the SST and SNB curves. The KR method proves to be robust, flexible, transparent, reproducible and easy to implement, and outperforms the benchmarks in- and out-of-sample. We show the limitations of all methods for extrapolating the yield curve and propose possible solutions for the extrapolation problem. We conclude that the KR method is the preferred method for estimating the discount curve.

Suggested Citation

  • Nicolas Camenzind & Damir Filipović, 2023. "Stripping the Swiss Discount Curve," Swiss Finance Institute Research Paper Series 23-97, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2397
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    More about this item

    Keywords

    Yield curve estimation; Swiss government bond market; Smith–Wilson method; Swiss Solvency Test; Swiss National Bank; machine learning in finance; reproducing kernel Hilbert space;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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