Best-estimates in bond markets with reinvestment risk

Artikel

The 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 Vasi¡cek model and derive within this framework closed-form expressions for the best-estimate prices of long-term bonds.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 3 ; Year: 2015 ; Issue: 3 ; Pages: 250-276 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft
• Subject: best-estimate price ; reinvestment risk ; dynamic hedging ; sequential local risk minimization ; incomplete market ; state-price deflator ; long-term bonds

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): MacKay, Anne ; Wüthrich, Mario V.
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2015

Further information

• DOI: doi:10.3390/risks3030250
• Handle: http://hdl.handle.net/10419/167855
• Last update: 10.03.2025, 11:44 AM CET