Vasicek interest rate model

Tässä tutkielmassa estimoidaan korkomallin parametrit Maximum likelihood metodilla sekä näytetään kuinka mallintaa lyhyen koron evoluutiota ja korkokäyrän rakennetta.

Machine learning Vasicek model calibration with Gaussian processes

In this article, we calibrate the Vasicek interest rate model under the risk neutral measure by learning the model parameters using Gaussian processes for machine learning regression. The calibration is done by maximizing the likelihood of zero coupon bond log prices, using mean and covariance functions computed analytically, as well as likelihood derivatives with respect to the parameters. The maximization method used is the conjugate gradients. The only prices needed for calibration are zero coupon bond prices and the parameters are directly obtained in the arbitrage free risk neutral measure.

Machine learning Gaussian short rate

Dissertação para obtenção do Grau de Doutor em Estatística e Gestão do Risco

Exchange Rate Stabilization and IMF High Interest Rate Policy: A Critical Reconsideration Using a Dynamic Model

This paper examines whether the IMF high interest rate policy was suitable for crisis-ridden East Asian economies. Using an "overshoot" model similar to that of Dornbusch's (1976), it shows that this sort of policy might cause an unnecessary deflationary adjusting process and have no effect on containing the real depreciation of exchange rates in the long run. The study also demonstrates that Thai economic data coincides quite well with the model presented here. Finally, it points out that the high interest policy itself might provoke high risk-premium, the existence of which, in turn, justifies the policy. This means that the policy has a self-fulfilling property. In conclusion, a "one-size-fits-all" adaptation of high interest rate policy in a currency crisis is very dangerous in general, and was inappropriate for East Asia. The desirable policy would have been to let currencies depreciate and keep interest rates stable.

Revisiting the interest rate puzzle

This article makes a connection between Lucas` (1978) asset pricing model and the macroeconomic dynamics for some selected countries. Both the relative risk aversion and the impatience for postponing consumption by synthesizing the investor behaviour can help to understand some key macroeconomic issues across countries, such as the savings decision and the real interest rate. I find that the government consumption makes worse the so-called `equity premium-interest rate puzzle`. The first root of the quadratic function for explaining the real interest rate can produce this puzzle, but not the second root. Thus, Mehra and Prescott (1985) identified only one possible solution.

Interest rate exposure of Spanish banks: A nonparametric analysis

Interest rate risk is one of the major financial risks faced by banks due to the very nature of the banking business. The most common approach in the literature has been to estimate the impact of interest rate risk on banks using a simple linear regression model. However, the relationship between interest rate changes and bank stock returns does not need to be exclusively linear. This article provides a comprehensive analysis of the interest rate exposure of the Spanish banking industry employing both parametric and non parametric estimation methods. Its main contribution is to use, for the first time in the context of banks’ interest rate risk, a nonparametric regression technique that avoids the assumption of a specific functional form. One the one hand, it is found that the Spanish banking sector exhibits a remarkable degree of interest rate exposure, although the impact of interest rate changes on bank stock returns has significantly declined following the introduction of the euro. Further, a pattern of positive exposure emerges during the post-euro period. On the other hand, the results corresponding to the nonparametric model support the expansion of the conventional linear model in an attempt to gain a greater insight into the actual degree of exposure.

Interest rate determination in the interbank market

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.

Option pricing under stochastic volatility and stochastic interest rate in the Spanish case

Among the underlying assumptions of the Black-Scholes option pricingmodel, those of a fixed volatility of the underlying asset and of aconstantshort-term riskless interest rate, cause the largest empirical biases. Onlyrecently has attention been paid to the simultaneous effects of thestochasticnature of both variables on the pricing of options. This paper has tried toestimate the effects of a stochastic volatility and a stochastic interestrate inthe Spanish option market. A discrete approach was used. Symmetricand asymmetricGARCH models were tried. The presence of in-the-mean and seasonalityeffectswas allowed. The stochastic processes of the MIBOR90, a Spanishshort-terminterest rate, from March 19, 1990 to May 31, 1994 and of the volatilityofthe returns of the most important Spanish stock index (IBEX-35) fromOctober1, 1987 to January 20, 1994, were estimated. These estimators wereused onpricing Call options on the stock index, from November 30, 1993 to May30, 1994.Hull-White and Amin-Ng pricing formulas were used. These prices werecomparedwith actual prices and with those derived from the Black-Scholesformula,trying to detect the biases reported previously in the literature. Whereasthe conditional variance of the MIBOR90 interest rate seemed to be freeofARCH effects, an asymmetric GARCH with in-the-mean and seasonalityeffectsand some evidence of persistence in variance (IEGARCH(1,2)-M-S) wasfoundto be the model that best represent the behavior of the stochasticvolatilityof the IBEX-35 stock returns. All the biases reported previously in theliterature were found. All the formulas overpriced the options inNear-the-Moneycase and underpriced the options otherwise. Furthermore, in most optiontrading, Black-Scholes overpriced the options and, because of thetime-to-maturityeffect, implied volatility computed from the Black-Scholes formula,underestimatedthe actual volatility.

Constant interest rate projections without the curse of indeterminacy

Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows howto construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework.

On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Machine learning analysis and modeling of interest rate curves

The present research deals with the review of the analysis and modeling of Swiss franc interest rate curves (IRC) by using unsupervised (SOM, Gaussian Mixtures) and supervised machine (MLP) learning algorithms. IRC are considered as objects embedded into different feature spaces: maturities; maturity-date, parameters of Nelson-Siegel model (NSM). Analysis of NSM parameters and their temporal and clustering structures helps to understand the relevance of model and its potential use for the forecasting. Mapping of IRC in a maturity-date feature space is presented and analyzed for the visualization and forecasting purposes.

An empirical comparison of forward-rate and spot-rate models for valuing interest-rate options

Our main goal is to investigate the question of which interest-rate options valuation models are better suited to support the management of interest-rate risk. We use the German market to test seven spot-rate and forward-rate models with one and two factors for interest-rate warrants for the period from 1990 to 1993. We identify a one-factor forward-rate model and two spot-rate models with two faetors that are not significant1y outperformed by any of the other four models. Further rankings are possible if additional cri teria are applied.

Bahamas and Barbados: empirical evidence of interest rate pass-through

Includes bibliography

A Bayesian analysis of the Conway-Maxwell-Poisson cure rate model

The purpose of this paper is to develop a Bayesian analysis for the right-censored survival data when immune or cured individuals may be present in the population from which the data is taken. In our approach the number of competing causes of the event of interest follows the Conway-Maxwell-Poisson distribution which generalizes the Poisson distribution. Markov chain Monte Carlo (MCMC) methods are used to develop a Bayesian procedure for the proposed model. Also, some discussions on the model selection and an illustration with a real data set are considered.

A Bayesian destructive weighted Poisson cure rate model and an application to a cutaneous melanoma data

In this article, we propose a new Bayesian flexible cure rate survival model, which generalises the stochastic model of Klebanov et al. [Klebanov LB, Rachev ST and Yakovlev AY. A stochastic-model of radiation carcinogenesis - latent time distributions and their properties. Math Biosci 1993; 113: 51-75], and has much in common with the destructive model formulated by Rodrigues et al. [Rodrigues J, de Castro M, Balakrishnan N and Cancho VG. Destructive weighted Poisson cure rate models. Technical Report, Universidade Federal de Sao Carlos, Sao Carlos-SP. Brazil, 2009 (accepted in Lifetime Data Analysis)]. In our approach, the accumulated number of lesions or altered cells follows a compound weighted Poisson distribution. This model is more flexible than the promotion time cure model in terms of dispersion. Moreover, it possesses an interesting and realistic interpretation of the biological mechanism of the occurrence of the event of interest as it includes a destructive process of tumour cells after an initial treatment or the capacity of an individual exposed to irradiation to repair altered cells that results in cancer induction. In other words, what is recorded is only the damaged portion of the original number of altered cells not eliminated by the treatment or repaired by the repair system of an individual. Markov Chain Monte Carlo (MCMC) methods are then used to develop Bayesian inference for the proposed model. Also, some discussions on the model selection and an illustration with a cutaneous melanoma data set analysed by Rodrigues et al. [Rodrigues J, de Castro M, Balakrishnan N and Cancho VG. Destructive weighted Poisson cure rate models. Technical Report, Universidade Federal de Sao Carlos, Sao Carlos-SP. Brazil, 2009 (accepted in Lifetime Data Analysis)] are presented.