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Andrew Kalotay

is a leading authority on the valuation and management of bonds with embedded options. He is a prolific contributor to the literature on topics ranging from advance refunding to the tax management of tax-exempt municipal bonds. His firm licenses fixed income valuation software and provides debt management advisory services. He is the current chairman of the FTSE Americas Bond Index Advisory Committee.
Before establishing Andrew Kalotay Associates in 1990, Dr. Kalotay was with Salomon Brothers. Prior to Wall Street, he was at Bell Laboratories and AT&T. On the academic side, he was the founding director of the graduate Financial Engineering program at Polytechnic University (now part of NYU).
Dr. Kalotay holds a B.Sc. and M.Sc. from Queen's University and a Ph.D. from the University of Toronto, all in mathematics. He was inducted into the Fixed Income Analyst Society’s "Hall of Fame" in 1997.


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Andrew Kalotay: Creating a Live Yield Curve in the Illiquid Muni Market

Tax-exempt municipal bonds (commonly known as ‘munis’) are unique to the US. In spite of its substantial size, the muni market is illiquid and lacks a robust live benchmark yield curve. Commonly available yield curves, provided by several vendors, are specified by the yields of 5% callable bonds. The yields are typically obtained by surveying major market participants.

Callable yield curves are fundamentally different from yield curves in other markets.  Moreover, they are often defective: they fail to be arbitrage-free, and their implied optionless curves are unrealistic. Analysts tend to use these callable curves as if they were optionless, a practice with unfortunate consequences. 

There is a current initiative, sponsored by the Associated Press, to create a live muni yield curve using market quotes for selected actively traded bonds. An appealing aspect of the AP curve is the transparency of the methodology. Preliminary indications are that this new yield curve could become a superior alternative to those currently available.    

Last modified: 2018.11.30.