Bootstrapping the OIS curve in a South African bank

Van Heeswijk, Dirk

Bootstrapping the OIS curve in a South African bank

Master Thesis

2017

Publisher

University of Cape Town

Department

Division of Actuarial Science

Faculty

Faculty of Commerce

Abstract

The financial crisis in 2007 highlighted the credit and liquidity risk present in interbank (LIBOR) rates, and resulted in changes to the pricing and valuation of financial instruments. The shift to Overnight Indexed Swap (OIS) discounting and multi-curve framework led to changes in the construction of interest rate zero curves, with the OIS curve being central to this methodology. Developed markets, such as the European (EUR), were able to adopt this framework due to the existence of a liquid OIS market. In the case of the South African (ZAR) market, the lack of such tradeable instruments poses the issue of how to construct or infer the OIS curve. Jakarasi et al. (2015) proposed a method to infer the OIS curve through the statistical relationship between SAFEX ROD and 3M JIBAR. The extension of the statistical relationship used by Jakarasi et al. (2015) to more statistically rigorous models, capable of capturing more information relating to the relationship between the rates, arises from the expected cointegrating relationship exhibited between rates. This dissertation investigates the implementation of such statistical models to infer the OIS curve in the ZAR market.

Keywords

Mathematical Finance

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