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Different Approaches to the Reference Yield Curve Construction—And Their Application into Fund Transfer Pricing Mechanism

In: Contemporary Trends and Challenges in Finance

Author

Listed:
  • Ewa Dziwok

    (University of Economics in Katowice)

  • Martin Wirth

    (University of Applied Sciences BFI Vienna)

Abstract

The paper investigates different approaches to the construction of a term structure of interest rates—reference rates that are the base for a Fund Transfer Pricing mechanism (FTP). While many positions in the literature focus on FTP mechanism as a part of asset liability management (ALM) process without any closer look at term structure construction, we identify features that let measure the behavior of the yield curve and detect the consequences of the model’s choice. The results show that the arbitrarily chosen model of the reference yield could have significant consequences for risk management process of a financial institution. The study provides a twofold contribution to the literature describing FTP mechanism. First it introduces more complex approach to the reference rate modeling inside FTP mechanism and shows the differences between considered models. Moreover it focuses on the construction of the reference curve itself and shows two different approaches covering a parsimonious model as well as Smith-Wilson one.

Suggested Citation

  • Ewa Dziwok & Martin Wirth, 2020. "Different Approaches to the Reference Yield Curve Construction—And Their Application into Fund Transfer Pricing Mechanism," Springer Proceedings in Business and Economics, in: Krzysztof Jajuga & Hermann Locarek-Junge & Lucjan T. Orlowski & Karsten Staehr (ed.), Contemporary Trends and Challenges in Finance, pages 149-157, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-43078-8_12
    DOI: 10.1007/978-3-030-43078-8_12
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