Estimating the South African Overnight Indexed Swap Curve

The 2007/2008 financial crisis exposed the fragility in the global banking sector - accordingly, inter-bank defined interest rates, viz. LIBOR, EURIBOR, JIBAR, etc., that were once deemed to be default-free, or at least close proxies thereof, are now deemed to be credit risky. In response to this, global financial markets have adopted a credit and liquidity homogenous multi-curve interest rate framework. The risk-neutral valuation of financial instruments has also been fundamentally altered, following the acceptance of a new proxy for a default-free discounting curve - this being the Overnight Indexed Swap (OIS) curve. Major financial markets, like the U.S. and the Euro zone, have swiftly developed liquid OIS markets, and have therefore adopted OIS discounting. The lack of consensus on, and the inaccessibility of, a tradable overnight rate in South Africa has hindered the development of an OIS market. Nonetheless, there is still a need for a South African default-free discounting curve, as the prevalent South African defined inter-bank JIBAR rates also carry an element of credit risk. In this paper we provide a potential solution, using cointegration to estimate an OIS curve for the South African market from a JIBAR-linked swap curve.