Different Approaches to the Reference Yield Curve Construction—And Their Application into Fund Transfer Pricing Mechanism

Ewa Dziwok () and Martin Wirth ()
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Ewa Dziwok: University of Economics in Katowice
Martin Wirth: University of Applied Sciences BFI Vienna

A chapter in Contemporary Trends and Challenges in Finance, 2020, pp 149-157 from Springer

Abstract: Abstract The paper investigates different approaches to the construction of a term structure of interest rates—reference rates that are the base for a Fund Transfer Pricing mechanism (FTP). While many positions in the literature focus on FTP mechanism as a part of asset liability management (ALM) process without any closer look at term structure construction, we identify features that let measure the behavior of the yield curve and detect the consequences of the model’s choice. The results show that the arbitrarily chosen model of the reference yield could have significant consequences for risk management process of a financial institution. The study provides a twofold contribution to the literature describing FTP mechanism. First it introduces more complex approach to the reference rate modeling inside FTP mechanism and shows the differences between considered models. Moreover it focuses on the construction of the reference curve itself and shows two different approaches covering a parsimonious model as well as Smith-Wilson one.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-43078-8_12

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DOI: 10.1007/978-3-030-43078-8_12

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