Interest Rate Risk

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Interest Rate Risk

Postby sruggiero » Wed Sep 01, 2010 9:43 am

If I want simulated bond prices/yield curve in the future for risk purposes is there a standard way of doing this? I don't just want athe PV01.

For example, one idea is to calibrate the Hull-White short rate SDE to today's data then simulate to the desired date. Then use the analytical formula for bond prices using this simulated short rate.

Although this feels a bit weird, as a calibrated HW will simulate in the risk-neutral world?

Any suggestions/references would be appreciated. Does Brigo & Mercurio cover this?

Stevie
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Re: Interest Rate Risk

Postby mj » Thu Sep 02, 2010 1:46 am

there is no real consensus on how to simulate real world yield curves.

We did a paper on this a long time back:

http://www.quarchome.org/realworldevolutionpaper.pdf

However, I don't think it's a great paper.
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Re: Interest Rate Risk

Postby smith30 » Tue Feb 15, 2011 7:48 am

Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.
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