Best-Estimates in Bond Markets with Reinvestment Risk
AbstractThe concept of best-estimate, prescribed by regulators to value insurance liabilities for accounting and solvency purposes, has recently been discussed extensively in the industry and related academic literature. To differentiate hedgeable and non-hedgeable risks in a general case, recent literature defines best-estimates using orthogonal projections of a claim on the space of replicable payoffs. In this paper, we apply this concept of best-estimate to long-maturity claims in a market with reinvestment risk, since in this case the total liability cannot easily be separated into hedgeable and non-hedgeable parts. We assume that a limited number of short-maturity bonds are traded, and derive the best-estimate price of bonds with longer maturities, thus obtaining a best-estimate yield curve. We therefore use the multifactor Vasiˇcek model and derive within this framework closed-form expressions for the best-estimate prices of long-term bonds. View Full-Text
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MacKay, A.; Wüthrich, M.V. Best-Estimates in Bond Markets with Reinvestment Risk. Risks 2015, 3, 250-276.
MacKay A, Wüthrich MV. Best-Estimates in Bond Markets with Reinvestment Risk. Risks. 2015; 3(3):250-276.Chicago/Turabian Style
MacKay, Anne; Wüthrich, Mario V. 2015. "Best-Estimates in Bond Markets with Reinvestment Risk." Risks 3, no. 3: 250-276.