Simulating term structure of interest rates with arbitrary marginals

Author: Guirreri, Andrea Consiglio; Sergio

Source: International Journal of Risk Assessment and Management, Volume 15, Number 4, September 2011 , pp. 299-313(15)

Publisher: Inderscience Publishers

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Abstract:

Decision models under uncertainty rely their analysis on scenarios of the economic factors. A key economic factor is the term structure of interest rates (yields). Simulation models of the yield curve usually assume that the conjugate distribution of the interest rates is lognormal. Dynamic models, like vector auto-regression, implicitly postulate that the logarithm of the interest rates is normally distributed. Statistical analyses have, however, shown that stationary transformations (yield changes) of the interest rates are substantially leptokurtic, thus posing serious doubts on the reliability of the available models. We propose in this paper a VARTA model (Biller and Nelson, 2003) to simulate term structures of the interest rates with arbitrary marginals. We will show that such an approach is able to simulate paths of the entire yield curve with distributional properties very close to those found in the empirical data.

Keywords: RISK, SAFETY AND EMERGENCY MANAGEMENT; Risk, Reliability and Safety; Security and Emergency Management

Document Type: Research article

DOI: http://dx.doi.org/10.1504/IJRAM.2011.042670

Affiliations: 1: Department of Statistics and Mathematics

Publication date: 2011-09-01

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