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Generating Interest Rate Stress Scenarios

Author

Listed:
  • Alan De Genaro Dario
  • Mariela Fernández

Abstract

This article describes the use of the Heath-Jarrow-Morton framework to generate stress scenarios for the term structure of the interest rate. By means of principal component analysis it is possible to reduce the dimensions of the problem and create a bridge between the information a specialist possesses for defining scenarios, such information generally being of low dimensions, and the robustness of the HJM model. The methodology is applied to Brazilian Market data during the market meltdown in 2008 and from other occasions.

Suggested Citation

  • Alan De Genaro Dario & Mariela Fernández, 2011. "Generating Interest Rate Stress Scenarios," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(3), pages 413-436.
    • Handle: RePEc:brf:journl:v:9:y:2011:i:3:p:413-436
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    More about this item

    Keywords

    Heath-Jarrow-Morton; Term Structure of the Interest Rate; Stress Test; Event Risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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