Browsing by Author "von Ahlften, Edela"

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    Roll-over risk in the South African interest rate market
    (Stellenbosch : Stellenbosch University, 2022-12) von Ahlften, Edela; Alfeus, Mesias; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.
    ENGLISH SUMMARY: This research assignment entails applying and extending the framework of Alfeus et al. (2020) to conduct an empirical analysis of the presence of roll-over risk in the emerging South African interest market. Alfeus et al. (2020) started from the observation that the swap basis spreads persistent in the market since the Global Financial Crisis of 2008 contradict classic arbitrage arguments and developed a framework where the spreads persist as a result of the presence of roll-over risk. This is the risk one might not be able to refinance (“roll over”) debt at the prevailing market rate when funding longer-term lending by shorter-term borrowing. Roll-over risk is explicitly modelled as a spread added to the overnight borrowing cost and can be modelled as a single risk by calibrating to Overnight Index Swaps (OIS), Interest Rate Swaps (IRS), and basis swaps, or separated into a “credit downgrade risk” and a “funding liquidity risk” component by adding Credit Default Swaps (CDS) to the set of calibration instruments. In South Africa, interest rate swaps referencing the 3-month Johannesburg Interbank Average Rate (JIBAR) are liquidly traded; there is, however, neither a liquid OIS nor CDS market. The framework of Alfeus et al. (2020) is therefore implemented in the South African market by first estimating the South African rand (ZAR) OIS curve, then calibrating the model to this curve and interest rate swaps referencing the 3-month JIBAR. The modelling from Alfeus et al. (2020) is extended by utilizing a term structure model with deterministic jumps when specifying the stochastic dynamics for the model variables.