Browse > Article
http://dx.doi.org/10.7465/jkdi.2014.25.6.1507

Volatility by the level of interest rate and RBC  

An, Junyong (Financial Planning Team, KB Life Insurance)
Lee, Hangsuck (Department of Actuarial Science/Mathematics, Sungkyunkwan University)
Ju, Hyo Chan (Department of Mathematics, Sungkyunkwan University)
Publication Information
Journal of the Korean Data and Information Science Society / v.25, no.6, 2014 , pp. 1507-1520 More about this Journal
Abstract
In this paper, we show that there is a positive correlation between the level and the volatility of interest rate and thus suggest that a proper interest rate volatility coefficient (IRVC), a factor used in evaluating the interest rate risk that insurers are exposed to, should be chosen in accordance with the level of interest rate. To this end, we calculate the historical volatility of interest rate using data on government bond yields and show a proportionate relationship between interest rate and historical volatility. The review of exponential Vasicek (EV) and Cox-Ingersoll-Ross (CIR) models for interest rate also confirms the positive correlation between them. The estimation of IRVC by EV and CIR models are 0.9 and 1.1, respectively, which are much smaller than the one under the current risk-based capital (RBC) requirement. We provide modified IRVCs reflecting the level of interest by the two interest rate models. Using modified IRVCs can be a more reasonable method to evaluate the interest rate risk that insurers face.
Keywords
Interest rate risk; risk-based capital; short-rate models; volatility;
Citations & Related Records
Times Cited By KSCI : 1  (Citation Analysis)
연도 인용수 순위
1 Cox, J. C., Ingersoll. Jr., J. E. and Ross, S. A. (1985). A theory of the term structure of interest rates. Econometrica, 53, 385-407.   DOI   ScienceOn
2 Brigo. D and Mercurio. F. (2001). Interest rate models: Theory and practice, Springer, New York.
3 Choi, J. (2010). A study on ALM tools suitable for life insurance liabilities. Journal of Actuarial Science, 2, 51-79.
4 Chung, S. (2003). Sensitivity of the stock returns distribution to changes in the level and volatility of interest rates. Korean Journal of Money and Finance, 8, 95-134.
5 Financial Supervisory Service. (2012). Manual for risk-based capital, available from www.fss.or.kr.
6 Kwon, O. and Lee, H. (2013). Interest sensitivity of floating rate product. Korean Insurance Journal, 95, 61-85.
7 Lee, B. and Park, D. (1999). A study on interest rate risk and firm value of property and liability insurers. The Journal of Risk Management, 12, 43-74.
8 Lee, H. (2013). Profit analysis of life insurance products with interest rate options. Journal of the Korean Data & Information Science Society, 24, 737-753.   과학기술학회마을   DOI   ScienceOn
9 Lee, W., Noh, B. and Jang, K. (1997). Analysis in the risk of interest rate volatility to insurers, Working paper, Korea Insurance Development Institute, Seoul.
10 Whang, I. (1998). Asset allocation and ALM of life insurance companies. Korean Journal of Business Administration, 19, 189-207.
11 Rhee, B. and Kim, J. (2013). Bank stock returns, interest rates and volatilities. Journal of Korean National Economy, 31, 63-84.
12 Shreve, S. (2004). Stochastic calculus for finance II: Continuous-time models, Springer, New York.
13 Vasicek, O. (1977). An equilibrium characterization of the term structure. Journal of Financial Economics, 5, 177-188.   DOI   ScienceOn
14 Zeytun S. and Gupta, A. (2007). A comparative study of the Vasicek and the CIR model of the short rate, Working paper, Fraunhofer-Institut fur Techno- und Wirtschaftsmathematik, Germany.