Efficient and Exact Simulation of the Gaussian Affine Interest Rate Models (with Application to the Hull White Model and G2++ Model)

International Journal of Financial Engineering, Volume 03, Issue 02, June 2016

14 Pages Posted: 12 Sep 2016 Last revised: 24 Apr 2018

Date Written: August 10, 2016

Abstract

The Gaussian affine interest rate models are widely used in the financial industry for pricing, hedging and also risk management purposes. We consider the multifactor models with time dependent parameters. Usually the models are simulated using some appropriate discretization schema because the joint distribution of the stochastic and discounting factors is not known. We derive the exact joint conditional distribution of the stochastic and discounting factors. Additionally we show how an efficient and exact Monte Carlo simulation of the Hull White and G2++ interest rates models could be performed.

Keywords: Affine Term Structure Model, Hull-White Model, Affine Interest Rate Model, Simulation, Exact, Efficient

JEL Classification: G00, G10, G12, G13

Suggested Citation

Ostrovski, Vladimir, Efficient and Exact Simulation of the Gaussian Affine Interest Rate Models (with Application to the Hull White Model and G2++ Model) (August 10, 2016). International Journal of Financial Engineering, Volume 03, Issue 02, June 2016 , Available at SSRN: https://ssrn.com/abstract=2837229

Vladimir Ostrovski (Contact Author)

Talanx Asset Management ( email )

Charles-de-Gaulle-Platz 1
Cologne, DE NRW 50679
Germany

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