Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective
AbstractModelling term-structure dynamics is an important component in measuring and managing the exposure of portfolios to adverse movements in interest rates. Model selection from the enormous term-structure literature is far from obvious and, to make matters worse, a number of recent papers have called into question the ability of some of the more popular models to adequately describe interest rate dynamics. The author, in attempting to find a relatively simple term-structure model that does a reasonable job of describing interest rate dynamics for risk-management purposes, examines two sets of models. The first set involves variations of the Gaussian affine term-structure model by modestly building on the recent work of Dai and Singleton (2000) and Duffee (2002). The second set includes and extends Diebold and Li (2003). After working through the mathematical derivation and estimation of these models, the author compares and contrasts their performance on a number of in- and out-of-sample forecasting metrics, their ability to capture deviations from the expectations hypothesis, and their predictions in a simple portfolio-optimization setting. He finds that the extended Nelson-Siegel model and an associated generalization, what he terms the "exponential-spline model," provide the most appealing modelling alternatives when considering the various model criteria.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 06-48.
Length: 89 pages
Date of creation: 2006
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Interest rates; Econometric and statistical methods; Financial markets;
Find related papers by JEL classification:
- C0 - Mathematical and Quantitative Methods - - General
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-02 (All new papers)
- NEP-CFN-2007-01-02 (Corporate Finance)
- NEP-CSE-2007-01-02 (Economics of Strategic Management)
- NEP-ECM-2007-01-02 (Econometrics)
- NEP-FMK-2007-01-02 (Financial Markets)
- NEP-FOR-2007-01-02 (Forecasting)
- NEP-MAC-2007-01-02 (Macroeconomics)
- NEP-RMG-2007-01-02 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diebold, Francis X. & Li, Canlin, 2006.
"Forecasting the term structure of government bond yields,"
Journal of Econometrics,
Elsevier, vol. 130(2), pages 337-364, February.
- Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
- Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
- Diebold, Francis X. & Piazzesi, Monica & Rudebusch, Glenn D., 2005.
"Modeling bond yields in finance and macroeconomics,"
CFS Working Paper Series
2005/03, Center for Financial Studies (CFS).
- Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," American Economic Review, American Economic Association, vol. 95(2), pages 415-420, May.
- Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," PIER Working Paper Archive 05-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, 2005. "Modeling bond yields in finance and macroeconomics," Working Paper Series 2005-04, Federal Reserve Bank of San Francisco.
- Francis X. Diebold & Monika Piazzesi & Glenn Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," NBER Working Papers 11089, National Bureau of Economic Research, Inc.
- Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 243-288, March.
- David Backus & Silverio Foresi & Abon Mozumdar & Liuren Wu, 1998.
"Predictable Changes in Yields and Forward Rates,"
NBER Working Papers
6379, National Bureau of Economic Research, Inc.
- David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Working Papers 02-29, Bank of Canada.
- Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
- John H. Cochrane & Monika Piazzesi, 2005.
"Bond Risk Premia,"
American Economic Review,
American Economic Association, vol. 95(1), pages 138-160, March.
- Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
- Andrew Ang & Monika Piazzesi, 2001.
"A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables,"
NBER Working Papers
8363, National Bureau of Economic Research, Inc.
- Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
- David J. Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Working Papers 04-48, Bank of Canada.
- Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
- David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Working Papers 08-34, Bank of Canada.
- Francisco Rivadeneyra & Oumar Dissou, 2011. "A Model of the EFA Liabilities," Discussion Papers 11-11, Bank of Canada.
- Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut fÃ¼r Volkswirtschaftslehre der UniversitÃ¤t Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany.
- David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Working Papers 07-13, Bank of Canada.
- Michele Manna & Emmanuela Bernardini & Mauro Bufano & Davide Dottori, 2013. "Modelling public debt strategies," Questioni di Economia e Finanza (Occasional Papers) 199, Bank of Italy, Economic Research and International Relations Area.
- Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," BORRADORES DE ECONOMIA 010502, BANCO DE LA REPÚBLICA.
- Daniel Vela, 2013. "Forecasting Latin-American yield curves: An artificial neural network approach," Borradores de Economia 761, Banco de la Republica de Colombia.
- Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.