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SESSION VII-1 : INTEREST RATES (21/12/2007 à 14h00)

Patrice Poncet (Université de Paris 1 – Panthéon Sorbonne)

An Analysis of the True Notional Bond System Applied to the CBOT T-Bonds Futures

Auteurs : BEN-ABDALLAH Ramzi, BEN-AMEUR Hatem and BRETON Michèle (Hec Montréal) Email:

Intervenants : BEN-ABDALLAH Ramzi (Hec Montréal)

Rapporteurs : MORAUX Franck (University of Rennes 1)

The main purpose of this paper is to apply the True Notional Bond System (TNBS) proposed
by Oviedo (2006) for the theoretical pricing of the Chicago Board of Trade Treasury-bond
futures, one of the most traded derivatives in the world. This system is proposed as an
alternative to the current conversion factor system (CFS), whose poor performance is
well known. In this paper, we price the CBOT T-bond futures as well as all its embedded
delivery options and compare the corresponding results under the CFS in a stochastic
interest rate framework. Our pricing procedure is an adaptation of the Dynamic Programming
(DP) algorithm described in Ben-Abdallah et al. (2006), giving the value of the futures
contract under the TNBS as a function of time and current short-term interest rate.
Numerical illustrations, provided under the Vacisek and CIR models, show that the TNBS
reduces dramatically the value of all the delivery options embedded in the CBOT T-bond

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A Structural Model for Sovereign Credit Risk

Auteurs : JEANNERET Alexandre (Swiss Finance Institute – University of Lausanne) Email :

Intervenants : JEANNERET Alexandre (Swiss Finance Institute – University of Lausanne)

Rapporteurs : RAIMBOURG Philippe (University of Paris 1)

This study examines the risk inherent to sovereign default on external debts denominated
in foreign currency. I develop a contingent claims theory of a sovereign, which optimally
chooses its level of foreign debt and default policy. In the model, renegotiation upon default
plays an important role in determining country creditworthiness. In crises episodes, the
sovereign initiates a process of debt restructuring with the lender. Both parties bargain
over a reduction of the debt service, which determines the level of economic sanctions.
With a recovery rate being endogenous to the model, I show that the generated credit
spreads are higher than when renegotiation is not accounted for and thus more consistent
to the data. This prediction stands in stark contrast to the existing theoretical literature.
On the empirical side, the analysis explores the relation between economic fundamentals
and offers predictions that are consistent with the empirical literature. Finally, I compare
credit spreads generated by the structural model with the observed EMBI+ spreads for a
sample of emerging economies. The model is able to replicate most of the daily credit spread
changes over the 1998-2006 period.

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Joint Modelling of International Yield Curves

Auteurs : KOIVU Matti, NYHOLM Ken and STROMBERG Jacob (European Central Bank) Email :

Intervenants : NYHOLM Ken (European Central Bank)

Rapporteurs : BEN-ABDALLAH Ramzy (Hec Montréal)

In this paper we propose a new approach to modelling and estimating yield curves across
multiple currency areas. The idea is that one area acts as the ‘cardinal’ economy by
affecting the yield curve evolution in the other markets. To some extent, the yield curve
factors of the ‘cardinal economy’ serve the role as global yield curve factors. The adopted
methodology is inspired by the 3-factor Nelson-Siegel yield curve model where a particular
loading structure is identified for the ‘non-cardinal’ currency areas. Using US, German and
Japanese data the model is shown to fit well both the cross-sectional and time-series dynamics
of yields.

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Testing for Instability in Factor Structure of Yield Curves

Auteurs : PHILIP Dennis & URGA Giovanni (Cass Business School), KAO Chihwa (Syracuse University) Email :

Intervenants : PHILIP Dennis (Cass Business School - Faculty Of Finance)

Rapporteurs : VILLA Christophe (ENSAE)

A widely relied upon but a formally untested consideration is the issue of stability in factors
underlying the term structure of interest rates. In testing for stability, practitioners as well
as academics have employed ad-hoc techniques such as splitting the sample into a few
sub-periods and determining whether the factor loadings have appeared to be similar over
all sub-periods. Various authors have found mixed evidence on stability in the factors. In
this paper we develop formal tests in order to evaluate the factor structure stability of the
US zero coupon yield term structure. We find the factor structure of level to be unstable
over the sample period considered. The slope and curvature factor structures are however
found to be stable. We corroborate the literature that variances (volatility) explained by the
level, slope, and curvature factors are unstable over time. We find evidence of the presence
of common economic shocks affecting the level and slope factors, unlike slope and curvature
factors that responded differently to economic shocks and were unaffected by any common

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