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The performance of deterministic and stochastic interest rate risk measures:

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  • Luís Oliveira
  • João Vidal Nunes
  • Luís Malcato

Abstract

The efficiency of traditional and stochastic interest rate risk measures is compared under one-, two-, and three-factor no-arbitrage Gauss-Markov term structure models, and for different immunization periods. The empirical analysis, run on the German Treasury bond market from January 2000 to December 2010, suggests that: i) Stochastic interest rate risk measures provide better portfolio immunization than the Fisher-Weil duration; and ii) The superiority of the stochastic risk measures is more evident for multi-factor models and for longer investment horizons. These findings are supported by a first-order stochastic dominance analysis, and are robust against yield curve estimation errors. Copyright ISEG 2014

Suggested Citation

  • Luís Oliveira & João Vidal Nunes & Luís Malcato, 2014. "The performance of deterministic and stochastic interest rate risk measures:," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(3), pages 141-165, December.
    • Handle: RePEc:spr:portec:v:13:y:2014:i:3:p:141-165
    DOI: 10.1007/s10258-014-0104-8
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    More about this item

    Keywords

    Interest rate risk; Asset-liability management; Immunization strategies; Stochastic duration; Stochastic dominance; G11; G12; G20; C15; E43;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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