Estimating Corporate Yield Curves
Antionio Diaz () and
Frank Skinner ()
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Antionio Diaz: Universidad de Castilla-La Mancha - Spain
Frank Skinner: ICMA Centre, University of Reading
ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading
This paper represents the first study of retail deposit spreads of UK financial institutions using stochastic interest rate modelling and the market comparable approach. By replicating quoted fixed deposit rates using the Black Derman and Toy (1990) stochastic interest rate model, we find that the spread between fixed and variable rates of interest can be modeled (and priced) using an interest rate swap analogy. We also find that we can estimate an individual bank deposit yield curve as a spread off a benchmark yield curve. This suggests that we can price a particular bank's products using arbitrage free interest rate methods since a basic input would be an estimate of the individual bank's yield curve. Finally, we are able to suggest that the libor/swap is the best benchmark yield curve to estimate an individual bank deposit yield curve.
Keywords: Credit Risk; Yield Curves; Credit Derivatives (search for similar items in EconPapers)
JEL-codes: G12 G13 G24 (search for similar items in EconPapers)
Pages: 20 pages
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2001-01
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