[R-SIG-Finance] R-SIG-Finance Digest - Yield Curve Modeling

Kevin Ramoutar kevinramoutar at yahoo.co.uk
Mon Nov 20 14:12:19 CET 2006

Hello Ryan,

Thanks for the help. But there is one problem. We do not have a swap market or derivatives market here in Trinidad. What then do I do?


----- Original Message ----
From: Ryan Sheftel <rsheftel at gmail.com>
To: Kevin Ramoutar <kevinramoutar at yahoo.co.uk>; r-sig-finance at stat.math.ethz.ch
Sent: Friday, 17 November, 2006 1:56:41 PM
Subject: RE: [R-SIG-Finance] R-SIG-Finance Digest - Yield Curve Modeling

I have never replied to a message on this group before, so apologies in
advance if I am not doing it the right way.

To construct a yield curve the best choice is to use a combination of the
LIBOR market for short rates, and the Swap markets for all maturities beyond
1 year. The LIBOR and swap market are derivative markets that are completely
free from the nuances and technicalities of a specific bond market (either
government or corporate). The standard practice is to use the LIBOR/Swap
markets to construct a yield (discount) curve. Then any other bond is quoted
and discounted at a spread to that curve.

The LIBOR and Swap market yield are available from a daily poll by the BBA
(British Bankers Association), and is available on their web site, via
Bloomberg, and the US Fed also re-publishes. The great part of the
LIBOR/Swap markets is that they publish rates for almost every maturity, so
there are no gaps in the yield curve. The Fed only publishes a sub-set, but
it should be enough to get you going.

BBA LIBOR http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=141&a=627

Federal Reserve H15 release

-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of Kevin Ramoutar
Sent: Friday, November 17, 2006 5:50 AM
To: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] R-SIG-Finance Digest - Yield Curve Modeling

Hello All,

Advance apologies for this not being specifically an R technical question.

I am attempting to construct the yield curve in a market characterised by
the following:

1. There isn't an organised market for bond secondary market bond trading
most corporate of issues are privately placed but the bond information is
available via the local SEC; 2. Bond issues (govt) are few and far between
lets say about 2-3 each quarter.
3. Most bonds issues are not rated by any agency so the extraction of the
credit spread is made even more difficult.

The short end of the curve is no problem as there are Government issues that
can cover up to the 1 year maturity.

Does anyone know of a case study or other literature that can provide
guidance? Your help would be greatly appreciated.


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