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Využití modelu BGM při řízení úrokového rizika v českém prostředí v období po finanční krizi
[Aplication of the BGM Model for Interest Rate Risk Management in the Czech Environment after Financial Crisis]


  • Dana Cíchová Králová


This article proposes an approach to an interest rate analysis for purposes of risk management.of fi nancial portfolio consisting of assets or liabilities linked to interest rates and held to maturity in the Czech environment. Czech fi nancial market is characterized by relative underdevelopment and relatively low liquidity, and in an environment of high uncertainty due to interventions and regulations of central banks and other authorities. This article fi rst describes the volatility of the Czech koruna and euro interest rates using the GARCH model. Based on this description, relationships between levels of koruna and euro swaptions volatilities are determined. After obtaining estimates of koruna swaptions implied volatilities, the BGM interest rate model is applied to Czech koruna and euro interest rate simulations. They are then compared with the real development of given interest rates. It turns out that although the BGM model was developed for the purpose fi nancial derivatives valuation in the environment of developed and liquid fi nancial markets without signifi - cant distortions, resulting simulations are relatively good, and their use can improve interest rate risk management even in the Czech environment.

Suggested Citation

  • Dana Cíchová Králová, 2015. "Využití modelu BGM při řízení úrokového rizika v českém prostředí v období po finanční krizi
    [Aplication of the BGM Model for Interest Rate Risk Management in the Czech Environment after Financial
    ," Politická ekonomie, University of Economics, Prague, vol. 2015(6), pages 714-758.
  • Handle: RePEc:prg:jnlpol:v:2015:y:2015:i:6:id:1023:p:714-758

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    References listed on IDEAS

    1. Alan Brace & Dariusz G¸atarek & Marek Musiela, 1997. "The Market Model of Interest Rate Dynamics," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 127-155.
    2. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
    3. Brigo, Damiano & Mercurio, Fabio & Morini, Massimo, 2005. "The LIBOR model dynamics: Approximations, calibration and diagnostics," European Journal of Operational Research, Elsevier, vol. 163(1), pages 30-51, May.
    4. Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. " Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
    5. Marek Rutkowski & Marek Musiela, 1997. "Continuous-time term structure models: Forward measure approach (*)," Finance and Stochastics, Springer, vol. 1(4), pages 261-291.
    6. Martin Vojtek, 2004. "Calibration of Interest Rate Models - Transition Market Case," Finance 0410015, University Library of Munich, Germany.
    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    More about this item


    volatility; GARCH; euro; Czech Koruna; interest rate risk; BGM model;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


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