GENERAL ANALYSIS OF LONG-TERM INTEREST RATES

Francesca Biagini, Alessandro Gnoatto and Maximilian Härtel ()
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Francesca Biagini: Department of Mathematics, LMU University, Theresienstrasse 39, D-80333 Munich, Germany2Department of Mathematics, University of Oslo, Box 1053, Blindern, 0316 Oslo, Norway
Maximilian Härtel: Department of Mathematics, LMU University, Theresienstrasse 39, D-80333 Munich, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 01, 1-29

Abstract: We introduce here the idea of a long-term swap rate, characterized as the fair rate of an overnight indexed swap (OIS) with infinitely many exchanges. Furthermore, we analyze the relationship between the long-term swap rate, the long-term yield, (F. Biagini, A. Gnoatto & M. Härtel (2018) Affine HJM Framework on Sd+ and long-term yield, Applied Mathematics and Optimization 77 (3), 405–441, F. Biagini & M. Härtel (2014) Behavior of long-term yields in a lévy term structure, International Journal of Theoretical and Applied Finance 17 (3), 1–24, N. El Karoui, A. Frachot & H. Geman (1997) A note on the behavior of long zero coupon rates in a no arbitrage framework. Working Paper. Available at Researchgate: https://www.researchgate.net/publication/5066730), and the long-term simple rate (D. C. Brody & L. P. Hughston (2016) Social discounting and the long rate of interest, Mathematical Finance 28 (1), 306–334) as long-term discounting rate. Finally, we investigate the existence of these long-term rates in two-term structure methodologies, the Flesaker–Hughston model and the linear-rational model. A numerical example illustrates how our results can be used to estimate the nonoptional component of a CoCo bond.

Keywords: Term structure; overnight indexed swap; long-term yield; long-term simple rate; long-term swap rate (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S0219024920500028

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