Advanced Search
MyIDEAS: Login to save this paper or follow this series

On the Range of Admissible Term-Structures

Contents:

Author Info

  • Areski Cousin

    ()
    (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)

  • Ibrahima Niang

    (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)

Registered author(s):

    Abstract

    In this paper, we analyze the diversity of term structure functions (e.g., yield curves, swap curves, credit curves) constructed in a process which complies with some admissible properties: arbitrage-freeness, ability to fit market quotes and a certain degree of smoothness. When present values of building instruments are expressed as linear combinations of some primary quantities such as zero-coupon bonds, discount factor, or survival probabilities, arbitrage-free bounds can be derived for those quantities at the most liquid maturities. As a matter of example, we present an iterative procedure that allows to compute model-free bounds for OIS-implied discount rates and CDS-implied default probabilities. We then show how mean-reverting term structure models can be used as generators of admissible curves. This framework is based on a particular specification of the mean-reverting level which allows to perfectly reproduce market quotes of standard vanilla interest-rate and default-risky securities while preserving a certain degree of smoothness. The numerical results suggest that, for both OIS discounting curves and CDS credit curves, the operational task of term-structure construction may be associated with a significant degree of uncertainty.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hal.archives-ouvertes.fr/docs/00/96/89/43/PDF/Cousin_Niang_On_the_range_of_admissible_term_structures.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00968943.

    as in new window
    Length:
    Date of creation: 01 Apr 2014
    Date of revision:
    Handle: RePEc:hal:wpaper:hal-00968943

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00968943
    Contact details of provider:
    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: Term-structure construction methods; OIS discounting curves; credit curves; model risk; arbitrage-free bounds; affine term-structure models;

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Ernst Eberlein & Sebastian Raible, 1999. "Term Structure Models Driven by General Lévy Processes," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 31-53.
    2. Leif Andersen, 2007. "Discount curve construction with tension splines," Review of Derivatives Research, Springer, Springer, vol. 10(3), pages 227-267, December.
    3. Mark H. A. Davis & David G. Hobson, 2007. "The Range Of Traded Option Prices," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 1-14.
    4. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
    5. Hainaut, Donatien & Devolder, Pierre, 2008. "Mortality modelling with Lévy processes," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 409-418, February.
    6. Masaaki Fujii & Yasufumi Shimada & Akihiko Takahashi, 2009. "A Note on Construction of Multiple Swap Curves with and without Collateral," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-154, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2010.
    7. Ernst Eberlein & Jean Jacod, 1997. "On the range of options prices (*)," Finance and Stochastics, Springer, Springer, vol. 1(2), pages 131-140.
    8. Patrick Hagan & Graeme West, 2006. "Interpolation Methods for Curve Construction," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(2), pages 89-129.
    9. Rama Cont, 2006. "Model Uncertainty And Its Impact On The Pricing Of Derivative Instruments," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 519-547.
    10. T. Clifton Green & Stephen Figlewski, 1999. "Market Risk and Model Risk for a Financial Institution Writing Options," Journal of Finance, American Finance Association, American Finance Association, vol. 54(4), pages 1465-1499, 08.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00968943. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.