 An analysis of the Solvency II regulatory framework’s Smith-Wilson model for the term structure of risk-free interest ratesJournal 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) Downloads: (external link) Related works: 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 DOI: 10.1016/j.jbankfin.2018.10.001 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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