Stochastic Scenario Generation for the Term Structure of Interest Rates |
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| Abstract | In models of risk and portfolio management in the fixed income security market as well as in models of pricing of interest rate sensitive derivatives one should model the most likely future movements of the whole term structure of interest rates. A lot of work has been done on modeling interest rates for derivative pricing purposes. But when it comes to generating interest rate scenarios for managing the risk and return of fixed income securities the amount of work done is less developed. In particular when using multi stage stochastic programming the bottle neck in many cases seems to be capturing the interest rate uncertainty properly in accordance with the state of the art economic and financial assumptions.
The objective is therefore to construct a model capable of capturing the interest rates in order to generate interest rate scenarios. The term structure of interest rates is modeled by using historical term structures This historical data has several dimensions which will be reduced to a few key factors of the term structure using factor analysis.
When we have recognized these factors they are used to construct a stochastic factor model capable of describing the future movement of the term structure of interest rates. The model used for that purpose is a vector autoregression model.
Finally the Factor model is used as an input into an scenario generating system to generate scenarios and make some general observations and experiments on them. |
| Type | Master's thesis [Academic thesis] |
| Year | 2007 |
| Publisher | Informatics and Mathematical Modelling, Technical University of Denmark, DTU |
| Address | Richard Petersens Plads, Building 321, DK-2800 Kgs. Lyngby |
| Series | IMM-Thesis-2007-110 |
| Note | Supervised by Prof. Jens Clausen, Kourosh M. Rasmussen, IMM, DTU |
| Electronic version(s) | [pdf] |
| BibTeX data | [bibtex] |
| IMM Group(s) | Operations Research |