Interest Rate Swap Valuation in the Chinese Market

Wei Cui, Min Dai, Steven Kou, Yaquan Zhang, Chengxi Zhang and Xianhao Zhu

Chapter 13 in Innovations in Insurance, Risk- and Asset Management:Proceedings of the Innovations in Insurance, Risk- and Asset Management Conference, 2018, pp 349-365 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Following the 2008 financial crisis, the dual curve discounting method became widely used in valuing interest rate swaps denominated in major currencies, which implies the market consensus of accepting Overnight Indexed Swap rates as new proxies of risk-free rates. However, in the Chinese market, the outdated single curve discounting method is still widely used, because there is no consensus on the choice of the risk-free rate proxy. We apply the dual curve discounting method to the Chinese interest rate swap market and recommend using the 7-day fixing repo rate, a benchmark interest rate of the Chinese repo market, as the risk-free rate. Empirically, using the single curve discounting method may significantly undervalue a swap contract to the fixed rate receiver.

Keywords: Insurance; Actuarial Science; Risk Measure; Reinsurance; Copula; Replicating Portfolio; Bayesian Finance; Risk Classification; Stochastic Dominance; Dynamic Hedging; Autoregressive Hidden Markov Models; Exchange-Traded Funds; Uncertainty Quantification; Fixed Income; Stochastic Processes for Finance (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789813272569_0013 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789813272569_0013 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789813272569_0013

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().