Model Insight - Curve Estimation for Municipal Bond Risk - January 2013
Jan 18, 2013
This paper describes the new MSCI curve fitting method for municipal bond curves and its application in the Barra municipal bond risk model. The new method replaces the municipal bond curves from Delphis-Hanover and Municipal Market Advisors. The MSCI method addresses the challenges presented by the large and heterogeneous municipal bond universe, the lack of liquid pricing, and the widespread presence of redemption provisions (embedded calls) in municipal bonds. Because the new curves are based directly on prices rather than contributed yield quotes, we believe the new method is more appropriate for market risk forecasts for municipal bond portfolios that are marked to market.