Scenario Generation for Long-Run Interest Rate Risk Assessment

42 Pages Posted: 14 Sep 2016 Last revised: 4 Nov 2016

See all articles by Robert F. Engle

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Emil Siriwardane

Harvard Business School - Finance Unit

Date Written: November 1, 2016

Abstract

We propose a statistical model of the term structure of sovereign yields tailored for long-term probability-based scenario generation and forecasts. While being simple to estimate, our model is able to reproduce simultaneously the positivity of the yield curve, high persistence, factor structure and time varying volatilities and correlations. It features a regime switching short rate model. A complete benchmark of the model following Diebold and Li is performed in terms of forecasting ability and coverage properties. We show that the proposed model improves performance relative to a standard model from the literature.

Keywords: Interest Rate Forecast, Regime Switching, Factor Model

JEL Classification: C32, C53, C58

Suggested Citation

Engle, Robert F. and Roussellet, Guillaume and Siriwardane, Emil, Scenario Generation for Long-Run Interest Rate Risk Assessment (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2828236 or http://dx.doi.org/10.2139/ssrn.2828236

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guillaume Roussellet (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Emil Siriwardane

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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