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Scenario generation for long run interest rate risk assessment

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  • Engle, Robert
  • Roussellet, Guillaume
  • Siriwardane, Emil

Abstract

We propose a statistical model of the term structure of U.S. treasury yields tailored for long-term probability-based scenario generation and forecasts. Our model is easy to estimate and is able to simultaneously reproduce the positivity, persistence, and factor structure of the yield curve. Moreover, we incorporate heteroskedasticity and time-varying correlations across yields, both prevalent features of the data. The model also features a regime-switching short-rate model. We evaluate the out-of-sample performance of our model in terms of forecasting ability and coverage properties, and find that it improves on the standard Diebold and Li model.

Suggested Citation

  • Engle, Robert & Roussellet, Guillaume & Siriwardane, Emil, 2017. "Scenario generation for long run interest rate risk assessment," Journal of Econometrics, Elsevier, vol. 201(2), pages 333-347.
  • Handle: RePEc:eee:econom:v:201:y:2017:i:2:p:333-347
    DOI: 10.1016/j.jeconom.2017.08.012
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Yield curve forecast; Risk management; Scenario simulation; Switching regimes;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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