Abstract
The rapid growth of new “exotic” interest rate derivatives, especially the important classes of path-dependent, has required the introduction of models capable of pricing and hedging these instruments which are dependent on correlated movements of the different maturity of the yield curve. Beyond the valuation models, financial institutions have a crucial need for risk management tools. One of the most important contribution to risk management in the 90s has been the development and implementation of the so called Value at Risk (VaR). To estimate VaR numbers, one needs to establish specific assumptions about the future behavior of the prices or of the factors (yield curve) that explain the prices in the case of an existing model that links the factors to the prices. In this paper, we use the Kohonen algorithm together with a Monte-Carlo simulation to generate long term path of the yield curve. To test the accuracy of our method to reproduce future paths that has the same stochastic properties than the historical path, we use both Cox, Ingersoll and Ross and Longstaff and Schwartz interest rate model to generate such an “historical” path. We then use the Generalized Method of Moments to verify if the simulated paths have the same properties than the “historical” ones.
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Cottrell, M., de Bodt, E., Grégoire, P. (1998). Interest Rates Structure Dynamics: A Non Parametric Approach. In: Refenes, AP.N., Burgess, A.N., Moody, J.E. (eds) Decision Technologies for Computational Finance. Advances in Computational Management Science, vol 2. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-5625-1_20
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DOI: https://doi.org/10.1007/978-1-4615-5625-1_20
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