Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-27T15:28:35.704Z Has data issue: false hasContentIssue false
  • English
  • Français

Report of the Fixed-Interest Working Group

Published online by Cambridge University Press:  10 June 2011

K.S. Feldman ,
B. Bergman ,
A.J.G. Cairns ,
G.B. Chaplin ,
G.D. Gwilt ,
P.R. Lockyer  and
F.B. Turley
K.S. Feldman
Affiliation:
Robert Fleming & Co Ltd, 25 Copthall Avenue, London EC2R 7DR, U.K. Tel: +44(0)171-638-5858; Fax: +44(0)171-628-0053; E-mail: keith.s.feldman@flemings.com
Get access Rights & Permissions [Opens in a new window]

Abstract

Actuarial models of the market in conventional British Government Stocks, also known as the Gilt-Edged market, are reviewed and contrasted with the methods which have been developed, during the last twenty years, by financial economists.

Following the Treasury's announcement in May 1995 (regarding the taxation of institutional bond holdings), the so-called ‘coupon effect’ has largely disappeared and gilt prices can now be fitted very closely by using the same simple discounting functions for both income and capital flows. A new model suitable for the calculation of yield indices is proposed and is contrasted with the model currently underlying the FTSE Actuaries Government Securities (FTSEAGS) Yield Indices. A number of new possible applications of the reformulated yield indices, such as forward pricing, asset/liability matching and stochastic simulation, are discussed. An analogous model for index-linked gilts leads to applications involving the forward market in the retail prices index.

A survey of professional users of the FTSEAGS Indices is described, and a revised presentation for the published yield indices is suggested. A summary of current statutory references to the indices is presented.

Keywords

GiltsFTSEAGS IndicesBond ModellingForward RatesInterest-Rate DerivativesMatching
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 4 , Issue 2 , 01 June 1998 , pp. 213 - 263
Copyright
Copyright © Institute and Faculty of Actuaries 1998

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Bjørk, T. & Christensen, B.J. (1997). Forward rate models and invariant manifolds. Preprint, Stockholm School of Economics.Google Scholar
Burman, J.P.et al. (1973). Yield curves for gilt-edged stocks, further investigation. Bank of England Quarterly Bulletin, September 1973.Google Scholar
Cairns, A.J.G. (1998). Descriptive bond-yield and forward-rate models for the British government securities' market. B.A.J. 4, 265–321.Google Scholar
Chaplin, G.B. (1998). A review of term-structure models and their applications. B.A.J. 4, 323–349.Google Scholar
Clarkson, R.S. (1978). A mathematical model for the gilt-edged market. T.F.A. 36, 85–160.Google Scholar
Cox, J.C., Ingersoll, J.E. & Ross, S.A. (1985). A theory of the term structure of interest rates. Econometrica, 53, 385–407.CrossRefGoogle Scholar
Dobbie, G.M. & Wilkie, A.D. (1978). The F.T.-Actuaries Fixed Interest Indices. J.I.A. 105, 15–26 and T.F.A. 36, 203–213.Google Scholar
Exley, C.J., Mehta, M.A. & Smith, A.D. (1997). The financial theory of defined benefit pension schemes. B.A.J. 3, 835–966.Google Scholar
Feldman, K.S. (1977). The gilt-edged market reformulated. J.I.A. 104, 227–240.Google Scholar
Flesaker, B. & Hughston, L.P. (1996). Positive interest. Risk, 9, No 1.Google Scholar
Gwilt, G.D. (1982). Presidential address. T.F.A. 38, 1–17.Google Scholar
Hartree, D.R. (1958). Numerical analysis. The Clarendon Press, Oxford.Google Scholar
Haycocks, H.W. & Flymen, J. (1964). The design, application and future development of the F.T.-Actuaries Index. T.F.A. 28, 377–422.Google Scholar
Heath, D.C., Jarrow, R.A. & Morton, A. (1992). Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuation. Econometrica, 60, 77–105.CrossRefGoogle Scholar
Ho, T.S.Y. & Lee, S.-B. (1986). Term structure movements and pricing interest rate contingent claims. Journal of Finance, 41, 1011–1029.CrossRefGoogle Scholar
Hughston, L.P. (1994). Financial observables. International Derivative Review, Dec. 1994, 11–14.Google Scholar
Hughston, L.P. (editor) (1996). Vasicek and beyond: approaches to building & applying interest rate models. Risk Publications, London.Google Scholar
Hull, J. & White, A. (1990). Pricing interest-rate derivative securities. The Review of Financial Studies, 3, 573–592.CrossRefGoogle Scholar
Hull, J.C. (1997). Options, futures, and other derivatives. Prentice Hall.Google Scholar
Inland Revenue (1995). The Taxation of Gilts and Bonds.Google Scholar
Lawley, D.N. & Maxwell, A.E. (1963). Factor analysis as a statistical method. Butterworths, London.Google Scholar
McCutcheon, J.J. & Scott, W.F. (1989). An introduction to the mathematics of finance. Heinemann, Oxford.Google Scholar
Mastronikola, K. (1991). Yield curves for gilt-edged stocks: a new model. Discussion paper Number 49, Bank of England.Google Scholar
Neftci, S.N. (1996). An introduction to the mathematics of financial derivatives. Academic Press.Google Scholar
Nelson, C.R. & Siegel, A.F. (1987). Parsimonious modelling of yield curves. Journal of Business, 60, 473–489.CrossRefGoogle Scholar
Pepper, G.T. (1963). The selection and maintenance of a gilt-edged portfolio. J.I.A. 90, 63–103.Google Scholar
Phillips, P. (1996). The Merrill Lynch guide to the gilt edged and sterling bond markets. Book Guild Ltd, Lewes.Google Scholar
Richard, S. (1978). An arbitrage model of the term structure of interest rates. Journal of Financial Economics, 6, 33–57.CrossRefGoogle Scholar
Svensson, L.E.O. (1994). Estimating and interpreting forward interest rates: Sweden 1992–1994. Working paper of the International Monetary Fund, 94.113, 33 pages.CrossRefGoogle Scholar
Tilley, J.A. & Mueller, M. (1991). Managing interest rate risk for long liabilities. Proceedings of the 2nd AFIR International Colloquium, 1.Google Scholar
Tilley, J.A. (1992). An actuarial layman's guide to building stochastic interest rate generators. T.S.A. 44, 509–538.Google Scholar
Van Bezooyen, J.T.S., Exley, C.J. & Smith, A.D. (1997). The valuation of retail price indexed liabilities subject to caps and floors. 1997 Investment Conference. Institute of Actuaries and Faculty of Actuaries.Google Scholar
Vasicek, O.A. (1977). An equilibrium characterization of the term structure. Journal of Financial Economics, 5, 177–188.CrossRefGoogle Scholar
Vetzal, K.R. (1994). A survey of stochastic continuous time models of the term structure of interest rates. Insurance: Mathematics & Economics, 14, 139–161.Google Scholar
Wilkie, A.D. (1984). On the calculation of ‘real' investment returns. J.I.A. 111, 149–172 and T.F.A. 39, 105–130.Google Scholar
Wilkie, A.D. (1995). More on a stochastic asset model for actuarial use. B.A.J. 1, 777–964.Google Scholar