Unspanned Stochastic Volatility Term Structure Model Applied in Negative Interest Rate Environment
Author | : Jan Sedlak |
Publisher | : |
Total Pages | : 50 |
Release | : 2016 |
ISBN-10 | : OCLC:1306010673 |
ISBN-13 | : |
Rating | : 4/5 (73 Downloads) |
Download or read book Unspanned Stochastic Volatility Term Structure Model Applied in Negative Interest Rate Environment written by Jan Sedlak and published by . This book was released on 2016 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: The interest rate transition from the positive environment, into the negative territory questions the consensus of interest rates and opens up a wide field of unresearched areas. To cope with the changing interest rate environment as well as satisfying regulatory criteria, a model following the Heath-Jarrow-Morton framework with Unspanned Stochastic Volatility is implemented. The model is constructed to match shocks to the level, slope and curvature of the term structure. Estimation is performed with Libor rates, Government rates and Swaption ATM normal implied volatilities from 2006-01-01 to 2015-03-12. The model is backtested both in sample and out of sample and compared to a Normal model and a Log Normal model. The model shows a good quantile fit to the medium and long end of the term structure and performs relatively better then the two challenger models.