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Post by Sapphire Capital on Sept 27, 2008 0:12:14 GMT 4
Multifactor Models for Managing Interest Rate Risk Sanjay Nawalkha University of Massachusetts at Amherst - Eugene M. Isenberg School of Management Gloria M. Soto Universidad de Murcia September 6, 2008 Abstract: How do the managers of financial institutions hedge against the effects of non-parallel yield curve shifts? This paper addresses this important issue by reviewing the important findings in the area of interest rate risk management over the past two decades. We discuss four classes of models in the fixed income literature that deal with hedging the risk of large, non-parallel yield curve shifts. These models are given as M-Absolute/M-Square models, duration vector models, key rate duration models, and principal component duration models. These models can be used for designing various passive strategies such as portfolio immunization, bond index replication, and duration gap management; and hybrid strategies (i.e., active/passive) such as targeted yield curve shifts speculation (based on change in either the height, and/or the slope, and/or the curvature of the yield curve) and contingent immunization. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1264282_code517836.pdf?abstractid=1264282&mirid=1
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