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Generating Yield Curve Stress-Scenarios

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Author Info

  • Arthur Charpentier

    ()
    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)

  • Christophe Villa

    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)

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    Abstract

    Several authors have proposed to combine movements in princi- pal components to generate scenarios of "large" historical changes in term structures, i.e. stress-scenarios. This approach, however, has at least two shortcommings. This paper answers at these two problems and proposes a general two-steps procedure. The rst step relies on tting the discount bond yields and the second step relies on estimating statistically independent variables. Using the distribution of independent components identi ed, we combine their movements to produce stress-scenarios by specifying separate "shocks" in each of the directions given by the three independent compo- nents. We apply our methodology to the U.S. term structure of interest rates over the last three decades.

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    File URL: http://hal.archives-ouvertes.fr/docs/00/55/05/82/PDF/StessTestYC.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00550582.

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    Date of creation: 28 Dec 2010
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    Handle: RePEc:hal:wpaper:hal-00550582

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00550582/en/
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: Term structure; Yield curve; IRR; Stress-Testing; Scenario analysis; Principal Component Analysis; Independant Component Analy- sis.;

    This paper has been announced in the following NEP Reports:

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    1. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
    3. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
    4. Farshid Jamshidian & Yu Zhu, 1996. "Scenario Simulation: Theory and methodology (*)," Finance and Stochastics, Springer, vol. 1(1), pages 43-67.
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