The Influence of Yield Curve Fitting Method on Forward Rate Correlations in Polish Market

• Autorzy: Ewa Dziwok
• Języki publikacji: EN

Abstrakty

EN

During last two decades the understanding of a role which forward rates and their volatilities play in creating de-correlation among interest rates has increased significantly. It caused a need of deeper analysis of whole term structure from new perspective as a complex process changing over time. Both central banks and traders (market makers) are deeply interested in building an interest model which let represent present situation in the market without losing the credibility. This is why they are looking for such estimation's method which does not lead to deteriorate the correlation among instantaneous forward rates. The purpose of the article is to extract the instantaneous 7-days forward rates from Polish money market through the use of the Svensson model in two different ways: first where the set of parameters is estimated via least squares method based on rates and second based on prices. Then it is possible to compare the volatility of the so constructed implied forward rates and shapes of forward rate correlations' surfaces. It was found that both correlation and volatilities of the forward rates inherit their structure from the type of error estimation procedure.(original abstract)

Słowa kluczowe

PL

Ryzyko stopy procentowej; Rynek pieniężny; Metoda najmniejszych kwadratów

EN

Interest rate risk; Money market; Least squares method

• Czasopismo: Prace Naukowe / Uniwersytet Ekonomiczny w Katowicach
• Rocznik: 2011
• Tom: Mathematical, Econometrical and Computer Methods in Finance and Insurance 2009
• Strony: 58-67

Twórcy

autor

Ewa Dziwok

• University of Economics in Katowice, Poland

Bibliografia

• Alexander C. (2009): Market Risk Analysis. Volume III. Pricing, Hedging and Trading Financial Instruments. John Wiley & Sons, Chichester.
• Choudhry M. (2004): Analysing and Interpreting the Yield Curve. John Wiley & Sons, Singapore.
• Fisher M., Nychka D., Zervos D. (1995): Fitting the Term Structure of Interest Rates with Smoothing Splines. "Finance and Economics Discussion Series", Federal Reserve Board, Working Paper 95-1.
• James J., Webber N. (2000): Interest Rate Modelling. John Wiley & Sons, Chichester.
• de La Grandville O. (2001): Bond Pricing and Portfolio Analysis. The MIT Press, Cambridge and London.
• McCulloch J.H. (1975): The Tax-adjusted Yield Curve. "Journal of Finance", No. 30.
• Musiela M., Rutkowski M. (2005): Martingale Methods in Financial Modelling. Springer-Verlag, Berlin Heidelberg.
• Nawalkha S.K., Soto G.M., Beliaeva N.A. (2005): Interest Rate Risk Modeling. John Wiley & Sons, Hoboken.
• Nelson C.R., Siegel A.F. (1987): Parsimonious Modelling of Yield Curves. "Journal of Business", 60 (4).
• Rebonato R. (2004): Volatility and Correlation. 2nd edition. John Wiley & Sons, Chichester.
• Svensson L.E.O. (1994): Estimating and Interpreting Forward Interest Rates: Sweden 1992-1994. NBER Working Paper Series, No. 4871.
• Tuckman B. (2002): Fixed Income Securities. 2nd edition, John Wiley & Sons, Hoboken.
• Waggoner D. (1997): Spline Methods for Extracting Interest Rates from Coupon Bond Prices. Federal Reserve Bank of Atlanta, Working Paper 97-10.