Annals of Operations Research

, Volume 100, Issue 1, pp 189–209

Term Structure Models in Multistage Stochastic Programming: Estimation and Approximation

  • Karl Frauendorfer
  • Michael Schürle
Article

DOI: 10.1023/A:1019223318808

Cite this article as:
Frauendorfer, K. & Schürle, M. Annals of Operations Research (2000) 100: 189. doi:10.1023/A:1019223318808

Abstract

This paper investigates some common interest rate models for scenario generation in financial applications of stochastic optimization. We discuss conditions for the underlying distributions of state variables which preserve convexity of value functions in a multistage stochastic program. One- and multi-factor term structure models are estimated based on historical data for the Swiss Franc. An analysis of the dynamic behavior of interest rates generated with these models reveals several deficiencies which have an impact on the performance of investment policies derived from the stochastic program. While barycentric approximation is used here for the generation of scenario trees, these insights may be generalized to other discretization techniques as well.

stochastic programming approximation term structure models 

Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Karl Frauendorfer
    • 1
  • Michael Schürle
    • 2
  1. 1.Institute of Operations ResearchUniversity of St. GallenSt. GallenSwitzerland
  2. 2.Institute of Operations ResearchUniversity of St. GallenSt. GallenSwitzerland

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