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A Two-Factor HJM Interest Rate Model for Use in Asset Liability Management

In: Asset and Liability Management Handbook

Author

Listed:
  • Sarp Kaya Acar
  • Ralf Korn
  • Kalina Natcheva-Acar
  • Jörg Wenzel

Abstract

With regard to asset liability management (ALM), the future evolution of the interest rate market plays a major role. This is natural, as with a deterministic evolution of the interest rate (in fact, only in a deterministic setting we could speak of the interest rate!), interest rate risk would not play a role in ALM. However, as the main objective of ALM is to relate payments occurring at dif-ferent times in a suitable way, especially when the time horizon is large, assum-ing a deterministic interest rate evolution is absolutely inappropriate. Thus, finding a good model for the evolution of the term structure of interest rates is one of the main obstacles to overcome for successful ALM.

Suggested Citation

  • Sarp Kaya Acar & Ralf Korn & Kalina Natcheva-Acar & Jörg Wenzel, 2011. "A Two-Factor HJM Interest Rate Model for Use in Asset Liability Management," Palgrave Macmillan Books, in: Gautam Mitra & Katharina Schwaiger (ed.), Asset and Liability Management Handbook, chapter 3, pages 62-76, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-30723-0_3
    DOI: 10.1057/9780230307230_3
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