Fixed-Income Pricing and the Replication of Liabilities
A new study introduces a model-free, static framework for fixed-income pricing, proving that no-arbitrage in bond markets guarantees a strictly positive discount curve that matches all market prices. The research unifies bonds, swaps, and repo transactions, showing swap-repo strategies can replicate bond cash flows. Using cash-flow matrices and linear programming, it avoids probabilistic models. While clarifying regulatory practices like Solvency II, the paper notes unresolved issues with portfolio uniqueness and real-world market frictions.
What it examines
This paper presents a model-free framework for pricing fixed-income instruments and replicating insurance liabilities. It focuses on static arbitrage, showing that arbitrage-free pricing is possible if a positive discount curve exists, and explores how bonds, swaps, and repos can be used for liability replication under regulatory rules.
What it concludes
The study provides a unified approach for pricing and replicating liabilities, useful for insurance asset-liability management and regulatory capital assessment. It highlights open questions about uniqueness of solutions and suggests further research on optimal hedging strategies. Applications include constructing discount curves and designing cost-effective portfolios to meet future financial obligations.
Evidence objects
Researchers unveil a model-free, static framework for fixed-income pricing, proving that the absence of arbitrage guarantees a strictly positive discount curve capable of reproducing all observed market prices.
key_findings bullet 1 · key_findings · validation V0
The study introduces the 'fundamental theorem of fixed-income pricing,' showing that insurance liabilities can be super-replicated using least-cost portfolios, even when perfect replication is impossible, unifying bonds, swaps, and repo transactions.
key_findings bullet 2 · key_findings · validation V0
Using cash-flow matrices and linear programming instead of probabilistic models, the paper clarifies regulatory practices like Solvency II but leaves open questions about portfolio uniqueness and real-world market frictions.
key_findings bullet 3 · key_findings · validation V0
This paper introduces a novel, model-free, static framework for fixed-income pricing and liability replication, uniquely formalizing static arbitrage using cash-flow matrices and observed prices. Its originality lies in rigorously characterizing arbitrage-free discount curves, offering fresh theoretical insights and practical relevance for fixed income, insurance, and asset-liability management.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
Abstract: …replication within this static framework. The results provide a unified foundation for discount-curve construction and liability-driven investment, with direct relevance for economic capital assessment and regulatory practice. ▽ More This paper develops a model-free framework for static fixed-income pricing and the replication of liability cash flows. We show that the absence of static arbitrage across a universe of fixed-income instruments is equivalent to the existence of a strictly positive discount curve that reproduces all observed market prices. We then study the replication and super-replication of liabilities and establish conditions ensuring the existence of least-cost super-replicating portfolios, including a rigorous interpretation of swap--repo replication within this static framework. The results provide a unified foundation for discount-curve construction and liability-driven investment, with direct relevance for economic capital assessment and regulatory practice. △ Less
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