Variants of the Smith-Wilson method with a view towards applications
Risk Management
2019-06-18 v1
Abstract
We propose two variants of the Smith-Wilson method for practical application in the insurance industry. Our first variant relaxes the Smith-Wilson energy and can be used to incorporate less reliable market data with a certain weight rather than disregarding it completely. This is particularly useful for deriving yield curves in the IFRS 17 accounting regime, where there is a mandate to incorporate all available market data. A second variant incorporates the requirement to reach the ultimate forward rate at a prescribed term into the problem formulation. This provides a natural way to fulfil the Solvency II convergence requirement and is more elegant than the current methodology adapting the term-scale parameter to control convergence.
Keywords
Cite
@article{arxiv.1906.06363,
title = {Variants of the Smith-Wilson method with a view towards applications},
author = {Thomas Viehmann},
journal= {arXiv preprint arXiv:1906.06363},
year = {2019}
}