Estimating Corporate Yield Curves
This paper represents the first study of retail deposit spreads of UK financial institutions using stochastic interest rate modelling and the market comparable approach. By replicating quoted fixed deposit rates using the Black Derman and Toy (1990) stochastic interest rate model, we find that the spread between fixed and variable rates of interest can be modeled (and priced) using an interest rate swap analogy. We also find that we can estimate an individual bank deposit yield curve as a spread off a benchmark yield curve. This suggests that we can price a particular bank’s products using arbitrage free interest rate methods since a basic input would be an estimate of the individual bank’s yield curve. Finally, we are able to suggest that the libor/swap is the best benchmark yield curve to estimate an individual bank deposit yield curve.
|Date of creation:||2001|
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"A Markov Model for the Term Structure of Credit Risk Spreads,"
World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453
World Scientific Publishing Co. Pte. Ltd..
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- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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- Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October. Full references (including those not matched with items on IDEAS)
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