Term structure forecasting. Does a good fit imply reasonable simulation results?

  • Emile van Elen Emile van Elen

In this paper I question whether term structure models of interest rates used for pricing derivative instruments are suited to use in a simulation based context like an asset liability management (alm) study. I consider the Vasicek, Cox-Ingersoll-Ross (cir) and Nelson-Siegel model. First, I discuss the models and their merits and drawbacks. Second, I estimate the parameters of all three models. Estimates are based on monthly Canadian zero-coupon yields from 1986 up until and including 2009. I estimate the Vasicek model twice: once using time series of the two-year yields and once using cross-sectional data (i.e., the different maturity times). I calibrate the cir model using time series of the two-year yields and the Nelson-Siegel model using cross-sectional data. Third, I simulate the models. I simulate the Vasicek and cir short rate processes by their discrete representations, whereas I simulate the factors of the NelsonSiegel with a first-order vector autoregressive (var(1)) model. I judge the term structure models’ empirical fit as well as dynamics in the alm study and find that the Nelson-Siegel model outperforms the Vasicek and cir models.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2023-2027           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

B20231704_DNB_Blacklogo
svb
B20211216_shell download
B20160708_uva
B20200924_Ortec Finance logo 250px_banner_small
Bekijk al onze partners