Post by Sapphire Capital on Jul 16, 2008 6:23:21 GMT 4
The Performance of Deterministic and Stochastic Interest Rate Risk Measures
LUÍS OLIVEIRA
Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE) - ISCTE Business School
JOÃO PEDRO VIDAL NUNES
ISCTE Business School
LUÍS MALCATO
ISCTE Business School / Portuguese Association of Insurers (APS) February 2008
Abstract:
This paper compares the efficiency of traditional and stochastic interest rate risk measures under two distinct interest rate term structure frameworks: the Nelson-Siegel specification and an HJM consistent parametrization, as proposed by Bjork and Christensen(1999). Empirical analysis suggests that, under a multi-factor HJM interest rate model, the use of stochastic interest rate risk measures provides better portfolio immunization than traditional counterparts. Additionally our results suggest that, for immunization purposes and despite the use of deterministic risk measures, the yield curve specification is an issue of primary importance.
These findings contradict those of Agca (2005), who argues in favor of traditional interest rate risk measures. However, our study uses real market data and goes beyond the single-factor HJM framework prevalent in the literature.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1102116_code352527.pdf?abstractid=1102116&mirid=3
LUÍS OLIVEIRA
Instituto Superior de Ciências do Trabalho e da Empresa (ISCTE) - ISCTE Business School
JOÃO PEDRO VIDAL NUNES
ISCTE Business School
LUÍS MALCATO
ISCTE Business School / Portuguese Association of Insurers (APS) February 2008
Abstract:
This paper compares the efficiency of traditional and stochastic interest rate risk measures under two distinct interest rate term structure frameworks: the Nelson-Siegel specification and an HJM consistent parametrization, as proposed by Bjork and Christensen(1999). Empirical analysis suggests that, under a multi-factor HJM interest rate model, the use of stochastic interest rate risk measures provides better portfolio immunization than traditional counterparts. Additionally our results suggest that, for immunization purposes and despite the use of deterministic risk measures, the yield curve specification is an issue of primary importance.
These findings contradict those of Agca (2005), who argues in favor of traditional interest rate risk measures. However, our study uses real market data and goes beyond the single-factor HJM framework prevalent in the literature.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1102116_code352527.pdf?abstractid=1102116&mirid=3