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
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)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
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 ().