Risk Premiums in the Term Structure of Interest Rates
Date Issued
2006
Date
2006
Author(s)
Chu, Hsiang-Hui
DOI
zh-TW
Abstract
This dissertation investigates the risk premiums that are involved in the term structure of interest rates. Many factors may influence the risk premiums, including liquidity risk, credit risk, market risk, operation risk and legal risk. Among these risks, liquidity risk and credit risk are frequently discussed. This dissertation explores how the two risks influence the risk premiums in the term structure of interest rates. This dissertation comprises three chapters to discuss the term structure of interest rates. Particularly, it explores how the liquidity risk and credit risk affect the risk premium and how to evaluate it. Pricing the interest rate swap spreads induced by the liquidity risk is discussed in chapter two. In chapters three and four discuss two models for valuing credit derivatives.
Chapter two in this dissertation, “Term Structure of Interest Rate Swap Spreads--Consistent with Current Term Structure of Interest Rates and Analytical Solution,” follows Grinblatt’s idea that attributes the IRS spreads to the liquidity risk and overcomes the drawback for the inconsistency between the theory and empirical studies of Grinblatt (2001). This study assumes that the short rate and liquidity follow the Hull-White (1990b) model and computes the term structure of swap spreads, which can be exactly consistent with today’s term structure. The empirical results of this paper are comparable to those of Grinblatt (2001), and the model fits quite well the sample of actual IRS spreads. In addition, the empirical results conducted for out-samples indicate that this model has the capacity to accurately forecast the future trend of out-sample IRS spreads. However, the accuracy of the predictions of future IRS spreads for out-samples remains inadequate.
The chapter three in this dissertation, “A Generalized Markov Model for the risk premium adjustment” expands the state space to incorporate the credit rating changes into the model, and thus a more generalized risk premium adjustment function is achieved. For example, suppose credit rating for a firm is divided into three grades A, B and C, where A represents the highest credit class, B the second highest, and C the lowest credit class. If the credit rating of firms that are currently rated B, they may probably derive from C B, B B or A B. Despite the firms are rated B, it must be noted that they have turned to B from different grades, and that will give investors different feelings of the credit risk. In the model given, the risk premium adjustment function for the three different firms C B, B B or A B should be different. Therefore, if the information of the credit rating changes is incorporated into the model, it will be a more generalized structure for pricing the credit derivatives.
The chapter four in this dissertation, “A Generalized Markov Chain Model with Stochastic Default Rate for Valuation of Credit Spreads”, introduces a general stochastic matrix to discuss the shortcomings in Kodera’s model.
Subjects
利率期限結構
流動性風險
信用風險
利率交換利差
回復率
Term Structure of Interest Rates
Liquidity risk
Credit risk
Interest Rate Swap Spreads
Recovery Rate
Type
thesis
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