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Fixed-Income Pricing and the Replication of Liabilities

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  • Damir Filipovi'c

Abstract

This paper develops a model-free framework for static fixed-income pricing and the replication of liability cash flows. We show that the absence of static arbitrage across a universe of fixed-income instruments is equivalent to the existence of a strictly positive discount curve that reproduces all observed market prices. We then study the replication and super-replication of liabilities and establish conditions ensuring the existence of least-cost super-replicating portfolios, including a rigorous interpretation of swap--repo replication within this static framework. The results provide a unified foundation for discount-curve construction and liability-driven investment, with direct relevance for economic capital assessment and regulatory practice.

Suggested Citation

  • Damir Filipovi'c, 2025. "Fixed-Income Pricing and the Replication of Liabilities," Papers 2512.14662, arXiv.org, revised Dec 2025.
    • Handle: RePEc:arx:papers:2512.14662
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    References listed on IDEAS

    as
    1. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    2. Jens H. E. Christensen & Nikola Mirkov, 2021. "The Safety Premium of Safe Assets," Working Paper Series 2019-28, Federal Reserve Bank of San Francisco.
    3. Filipović, Damir & Trolle, Anders B., 2013. "The term structure of interbank risk," Journal of Financial Economics, Elsevier, vol. 109(3), pages 707-733.
    4. Jens H. E. Christensen & Nikola Mirkov, 2021. "Exploring the Safety Premium of Safe Assets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2021(13), pages 01-05, May.
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