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Modelling Specific Interest Rate Risk with Estimation of Missing Data

Author

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  • Thomas Siegl
  • Peter Quell

Abstract

For the treatment of specific interest rate risk, a risk model is suggested, quantifying and combining both market and credit risk components consistently. The market risk model is based on credit spreads derived from traded bond prices. Though traded bond prices reveal a maximum amount of issuer specific information, illiquidity problems do not allow for classical parameter estimation in this context. To overcome this difficulty an efficient multiple imputation method is proposed that also quantifies the amount of risk associated with missing data. The credit risk component is based on event risk caused by correlated rating migrations of individual bonds using a Copula function approach.

Suggested Citation

  • Thomas Siegl & Peter Quell, 2004. "Modelling Specific Interest Rate Risk with Estimation of Missing Data," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(3), pages 283-309.
  • Handle: RePEc:taf:apmtfi:v:12:y:2004:i:3:p:283-309
    DOI: 10.1080/1350486042000297243
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    References listed on IDEAS

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    1. Charles S. Morris & Robert Neal & Doug Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper 98-08, Federal Reserve Bank of Kansas City.
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