smithwilson2 0.0.1

A package to extrapolate forward rates using the EIOPA Smith-Wilson method.

This package ...

This package can be used to extrapolate forward rates, spot rates and other outputs using the method developed by EIOPA for the extrpolation of risk-free term structures. Mathematical details can be found here: https://www.eiopa.europa.eu/document/download/0ab82697-40a6-49ad-930f-211b649c1be9_en?filename=EIOPA-BoS-24-099-Report-on-the-Calculation-of-the-UFR-for-2025.pdf. Using as input observed forward rates for the next 20 (or other value) years, the code extrapolates these rates for a given timeframe, e.g., 80 years. The other necessary inputs are explained below.

Code Origin

The entirety of this code was written by Kilian de Ridder. The code reproduces the VBA code EIOPA provides for use in excel.

Main function, inputs and outputs

The main function is: extrapolate_with_sw(rates_obs, ufr, t2, Tau, extrapolation_target, nrofcoup, instrument, alfamin)

Inputs

rates_obs: is a vector of observed liquid yields, e.g., for the next twenty years. ufr (ultimate forward rate): the rate the extrapolation of forward rates should ultimately converge to t2: the convergence maturity, that is, the point at which fitted forward rates should have converged to the ufr, where we specify how close this convergence needs to be. Tau: The convergence tolerance in basis points. The fitted forward rates are constrained to be less or equal than Tau basis points away from the ufr at the convergence maturity. extrapolation_target: the maturity until which our extrapolation should be executed. nrofcoup: The number of coupons payments per year, if there are any. Put 1 (or anything else) for coupon-less instruments, the nrofcoup will be set to 1 by the code. instrument: arguments are "Zero", "Bond", "Swap". "Zero" is for any instruments without coupon payments, for example, payments that have to be made at one point in time without prior interest payments. "Bond" and "Swap" for those instruments with coupon payments inbetween. alfamin: The minimum convergence speed, should be set to 0.05 according to EIOPA.

Outputs

The function returns a pandas DataFrame with 7 columns and (extrapolation_target + 1) rows. The columns are: maturities discount factor spot intensity spot rate forward intensity forward rate cc forward rate ac And thus reproduce the outputs the vba code in excel also produces.

How to use the package

1. Install the package and import it using import smithwilson2.smithwilson2 as sw
2. Specify the above inputs, using alfamin = 0.05 and the current ufr published by EIOPA (e.g., 0.33).
3. Call the extrapolate_with_sw(rates_obs, ufr, t2, Tau, extrapolation_target, nrofcoup, instrument, alfamin) function, e.g. output = (rates_obs, ufr, t2, Tau, extrapolation_target, nrofcoup, instrument, alfamin) print(output) This output can thne easily be written to a csv file.