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

[Micha Keijzers]

2006/11/20, Kevin Ramoutar <kevinramoutar at yahoo.co.uk>:
> 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?
>
> Kevin

Hi Kevin,

[I don't know if it is correct in this group to not top-post. And
also, this topic is not R-specific anymore. But anyway, here (as well
as Ryan) goes also my first post to this list...]

What you might do is look for another swap market that closely
resembles a virtual swap rate in Trinidad. Do "Trinidad swap rates" in
some way follow neighbouring country's swap rates? Is there a global
swap rate that governs Trinidad's? Anyway, look for a rate that
determines Trinidad's market fundamentals *as if there was a swap
market* and use that rate. Not sure if you can do much better than
that.

Basically, the idea of the above is probably what was already
mentioned below by Ryan. It could be that a Trinidad swap rate would
be governed by LIBOR-rates. In that case, use LIBOR-rates.

And by the way, for the short end of the curve, as you mentioned that
this is not a problem, there is a way to combine the short end of the
curve with the longer end of some other curve. This would inherently
give a discontinuity at the pasting point, but there's a way to get
around this. If you simply have a grid of collected swap rates (from
two different closely resembling sources) one could use a spline-based
method (cubic spline) or a Nelson-Siegel curve fit to obtain the total
yield curve.

Hope this helps, and if others have better ideas...

Kind regards,
Micha Keijzers

>
> ----- 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
> http://www.federalreserve.gov/releases/h15/update/
>
> -----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.
>
> Regards
> Kevin
>
> Send instant messages to your online friends http://uk.messenger.yahoo.com
>
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