EconPapers    
Economics at your fingertips  
 

An analysis of the Solvency II regulatory framework’s Smith-Wilson model for the term structure of risk-free interest rates

Peter Jørgensen ()

Journal of Banking & Finance, 2018, vol. 97, issue C, 219-237

Abstract: In the European Union financial regulation requires that life and pension (L&P) companies use the Smith and Wilson (2000) model for the term structure of risk-free interest rates when valuing their liabilities and long term guarantees. Some key features of this model are that it allows for a perfect fit to market observed bond prices, and that its extrapolated long rates converge towards a constant level, the Ultimate Forward Rate (UFR). Both this level and the rate at which convergence towards it takes place are directly specified via parameters of the model. Since the Smith–Wilson model is not one of finance theory’s standard term structure models, we introduce the model and summarize its most important mathematical properties. We also describe how the European Solvency II regulation came to embrace this particular model.

Keywords: Solvency II; Financial regulation; Term structure of interest rates; Calibration; Market valuation (search for similar items in EconPapers)
JEL-codes: G12 G22 G28 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426618302206
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:97:y:2018:i:c:p:219-237

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-10-06
Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:219-237