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Issues with the Smith-Wilson method
Stockholm University, Faculty of Science, Department of Mathematics.
Stockholm University, Faculty of Science, Department of Mathematics.
Number of Authors: 2
2016 (English)In: Insurance, Mathematics & Economics, ISSN 0167-6687, E-ISSN 1873-5959, Vol. 71, 93-102 p.Article in journal (Refereed) Published
Abstract [en]

We analyse various features of the Smith Wilson method used for discounting under the EU regulation Solvency II, with special attention to hedging. In particular, we show that all key rate duration hedges of liabilities beyond the Last Liquid Point will be peculiar. Moreover, we show that there is a connection between the occurrence of negative discount factors and singularities in the convergence criterion used to calibrate the model. The main tool used for analysing hedges is a novel stochastic representation of the Smith Wilson method.

Place, publisher, year, edition, pages
2016. Vol. 71, 93-102 p.
Keyword [en]
Smith-Wilson, Discount curve, Yield curve, Interpolation, Extrapolation, Hedging, Totally positive matrix, Solvency II
National Category
Economics and Business Mathematics Sociology
Identifiers
URN: urn:nbn:se:su:diva-139322DOI: 10.1016/j.insmatheco.2016.08.009ISI: 000390078300009OAI: oai:DiVA.org:su-139322DiVA: diva2:1073864
Available from: 2017-02-13 Created: 2017-02-13 Last updated: 2017-02-13Bibliographically approved

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Lagerås, AndreasLindholm, Mathias
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