Consistent fitting of one-factor models to interest rate data

Rogers, L. C. G.; Stummer, Wolfgang

doi:10.1016/s0167-6687(00)00039-1

Cited by 5 publications

(3 citation statements)

References 77 publications

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“…The fact that the stochastic structure of the yield curve changes has been recognized for some two decades. Using eigenvalue analysis, akin to the factor models we study, Rogers and Stummer () provide evidence that there are periods of over which parameters remain constant. A currently established approach is to use hidden Markov chains to estimate the structural changes together with the parameters of the affine structure; see Nieh et al.…”

Section: Introductionmentioning

confidence: 99%

Change point tests in functional factor models with application to yield curves

Bardsley

Horváth

Kokoszka

et al. 2017

The Econometrics Journal

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Summary Motivated by the problem of the detection of a change point in the mean structure of yield curves, we introduce several methods to test the null hypothesis that the mean structure of a time series of curves does not change. The mean structure does not refer merely to the level of the curves, but also to their range and other aspects of their shape, most prominently concavity. The performance of the tests depends on whether possible break points in the error structure, which refers to the random variability in the aspects of the curves listed above, are taken into account or not. If they are not taken into account, then an existing change point in the mean structure may fail to be detected with a large probability. The paper contains a complete asymptotic theory, a simulation study and illustrative data examples, as well as details of the numerical implementation of the testing procedures.

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Section: Introductionmentioning

confidence: 99%

Change point tests in functional factor models with application to yield curves

Bardsley

Horváth

Kokoszka

et al. 2017

The Econometrics Journal

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“…The estimation technique is adopted from Rogers and Stummer [16] and Kladıvko [17]. It uses the General Method of Moments (GMM) approach with M + 2 moment conditions.…”

Section: Interest Rate Modelmentioning

confidence: 99%

Immunization and Hedging of Post Retirement Income Annuity Products

Liu

Sherris

2017

Risks

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Designing post retirement benefits requires access to appropriate investment instruments to manage the interest rate and longevity risks. Post retirement benefits are increasingly taken as a form of income benefit, either as a pension or an annuity. Pension funds and life insurers offer annuities generating long term liabilities linked to longevity. Risk management of life annuity portfolios for interest rate risks is well developed but the incorporation of longevity risk has received limited attention. We develop an immunization approach and a delta-gamma based hedging approach to manage the risks of adverse portfolio surplus using stochastic models for mortality and interest rates. We compare and assess the immunization and hedge effectiveness of fixed-income coupon bonds, annuity bonds, as well as longevity bonds, using simulations of the portfolio surplus for an annuity portfolio and a range of risk measures including value-at-risk. We show how fixed-income annuity bonds can more effectively match cash flows and provide additional hedge effectiveness over coupon bonds. Longevity bonds, including deferred longevity bonds, reduce risk significantly compared to coupon and annuity bonds, reflecting the long duration of the typical life annuity and the exposure to longevity risk. Longevity bonds are shown to be effective in immunizing surplus over short and long horizons. Delta gamma hedging is generally only effective over short horizons. The results of the paper have implications for how providers of post retirement income benefit streams can manage risks in demanding conditions where innovation in investment markets can support new products and increase the product range.

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“…Hong and Li (2002) 1 . However, single-factor models with a linear drift are widely used in practice because of their tractability and ability to fit yield curve of securities reasonably well (see Rogers and Stummer, 2000, and references therein). This is because most of the observed variability of the bond prices can be explained through a single factor 2 .…”

Section: Introductionmentioning

confidence: 99%

On the Small Sample Properties of Dickey-Fuller and Maximum Likelihood Unit Root Tests on Discrete-Sampled Short-Term Interest Rates

Rodrigues

Serrano

2004

SSRN Journal

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Testing for unit roots in short-term interest rates plays a key role in the empirical modelling of these series. It is widely assumed that the volatility of interest rates follows some time-varying function which is dependent of the level of the series. This may cause distortions in the performance of conventional tests for unit root nonstationarity since these are typically derived under the assumption of homoskedasticity. Given the relative unfamiliarity on the issue, we conducted an extensive Monte Carlo investigation in order to assess the performance of the DF unit root tests, and examined the effects on the limiting distributions of test procedures (t-and likelihood ratio tests) based on maximum likelihood estimation of models for short-term rates with a linear drift.

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Consistent fitting of one-factor models to interest rate data

Cited by 5 publications

References 77 publications

Change point tests in functional factor models with application to yield curves

Change point tests in functional factor models with application to yield curves

Immunization and Hedging of Post Retirement Income Annuity Products

On the Small Sample Properties of Dickey-Fuller and Maximum Likelihood Unit Root Tests on Discrete-Sampled Short-Term Interest Rates

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