Reference assets, yield

The historical volatility of the difference between the reference asset yield and the yield on a risk-free benchmark. 

Estimation of the historical volatility by considering the components historic volatility of the reference asset yield, historic volatility of the benchmark yield, correlation of the returns between the reference asset yield and the benchmark yield. 

The great asset of the time-dependent picture rests on the fact that no reference is made to the (many) stationary continuum states in the excited electronic state. The propagation of a single wavepacket, which contains the entire history of the dynamics in the upper state, thus yields the absorption cross section, all Raman cross sections, and the final state distributions of the photofragments. 

Making comparison between bonds could be difficult and several aspects must be considered. One of these is the bond s maturity. For instance, we know that the yield for a bond that matures in 10 years is not the same compared to the one that matures in 30 years. Therefore, it is important to have a reference yield curve and smooth that for comparison purposes. However, there are other features that affect the bond s comparison such as coupon size and structure, liquidity, embedded options and others. These other features increase the curve fitting and the bond s comparison analysis. In this case, the swap curve represents an objective tool to understand the richness and cheapness in bond market. According to O Kane and Sen (2005), the asset-swap spread is calculated as the difference between the bond s value on the par swap curve and the bond s market value, divided by the sensitivity of 1 bp over the par swap. 

Further research has produced a category of models that attempt to describe the jump feature of asset prices and interest rates. Observation of the markets confirms that many asset price patterns and interest rate changes do not move continuously from one price (rate) to another, but sometimes follow a series of jumps. A good example of a jump movement is when a central bank changes the base interest rate when this happens, the entire yield curve shifts to incorporate the effect of the new base rate. There is a considerable body of literature on the subject, and we only refer to a small number of texts here. 

Forward credit spreads are based on the risky forward rate less the riskfree forward rate. The forward credit spread can be estimated as the difference between the forward yield for a benchmark bond and the yield on the reference credit asset. 

To compute the expected return on equity, which is denoted by E ROE),Vx. (2.50) is applied. In this expression, E (ROE) is computed as the sum of a risk free rate and a risk premium (cpRe). The former term represents the rate of return of an investment free of default risk available in the market and is usually equal to the yield to maturity offered by a government security. The latter, represents the expected amount of return above the risk-free rate in exchange for a given amount of variance (Pratt 2002, Applequist et al. 2000). One of the most commonly employed methods to estimate the risk premium is the Capital Asset Pricing Model (CAPM). For more details regarding this topic the reader is referred to Sharpe (1999). 

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