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Generating Yield Curve Stress-Scenarios

Author

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  • Arthur Charpentier

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Christophe Villa

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Arthur Charpentier & Christophe Villa, 2010. "Generating Yield Curve Stress-Scenarios," Working Papers hal-00550582, HAL.
    • Handle: RePEc:hal:wpaper:hal-00550582
    Note: View the original document on HAL open archive server: https://hal.science/hal-00550582
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    References listed on IDEAS

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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. Farshid Jamshidian & Yu Zhu, 1996. "Scenario Simulation: Theory and methodology (*)," Finance and Stochastics, Springer, vol. 1(1), pages 43-67.
    3. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    4. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. "Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-1882, December.
    5. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
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    Cited by:

    1. Karimalis, Emmanouil & Kosmidis, Ioannis & Peters, Gareth, 2017. "Multi yield curve stress-testing framework incorporating temporal and cross tenor structural dependencies," Bank of England working papers 655, Bank of England.
    2. Johan Hagenbjörk & Jörgen Blomvall, 2019. "Simulation and evaluation of the distribution of interest rate risk," Computational Management Science, Springer, vol. 16(1), pages 297-327, February.
    3. Abdymomunov, Azamat & Gerlach, Jeffrey, 2014. "Stress testing interest rate risk exposure," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 287-301.

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