Deriving Implied Risk-Free Interest Rates from Bond and CDS Quotes: a Model-Independent Approach
We propose a market-consistent approach to the definition and construction of the implied term structure of the risk-free interest rates which are model-independent with respect to the choice of the fitting method. The main idea consists of the simultaneous fitting of the credit default swap (CDS) and the defaultable bond quotes where the theoretical prices are calculated in the framework of the reduced-form modelling of credit risk under standard assumptions. We obtain not only the implied risk-free zero-coupon yield curve but also the implied issuer-specific hazard rate curves. Prior to fitting, we perform a selection of bond issues and issuers. Next, we check for data consistency via arbitrage-like reasoning. Typically, the initial data needs a consistency adjustment, namely `artificial' widening of the observed bid-ask spreads for the selected financial instruments. We construct feasibility bands representing achievable precision of the fitting procedure depending on maturity. Then we apply this methodology to determine the term structure of the risk-free rates for the euro zone. This generic approach for the calculation of the risk-free reference rates in the euro zone can be helpful for the purposes of insurers and pension funds. In particular, the relevant term structure can be used in the assessment of technical provisions as requested in Article 77 of the Solvency II Level 1 text.
This paper reviews difficulties concerning a development of single-name CDS price (spread) dynamics model for the purpose of determination of margin requirements. It also discusses a possibility to construct such a model using information about respective equity prices and option implied volatilities. Finally, it presents the basic step towards the former idea demonstrating results for the CDS written on Gazprom senior debt.
The paper presents a review of stochastic framework for term structure modeling and shows comparative advantages of commonly used techniques. The main application of the research is coherent modeling of credit and interest rate risk for Euro zone issuers.
Today no one is surprised by the words traditional securitization. In the article an author considers one type of securitization, synthetic one. Without dwelling on the basic structures and concepts, the article describes the most interesting structure of synthetic securitization.
synthetic securitization, reference portfolio, pool of assets, structure of the transaction, Synthetic structure, Credit default swaps, credit protection, Tranche, Subordination, Credit enhancement
The paper examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the country's banking system in early 2012. The author offers a credible estimate of the size of the country's state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the author's interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the country's banking sector.
The paper examines the principles for the supervision of financial conglomerates proposed by BCBS in the consultative document published in December 2011. Moreover, the article proposes a number of suggestions worked out by the authors within the HSE research team.