Simulation of the term structure of interest rates: An application to the calculation of interest rate risk

Working papers | 2015 | N 70

Abstract

In order to provide a tool for risk management improvement and appropriate regulation, a methodology for measuring interest rate risk is applied in this paper. After estimating and simulating the interest rate term structure, the value at risk and expected shortfall are calculated on a portfolio. An application of alpha-stable distributions has allowed representing the asymmetric, leptokurtic and heavy tailed shape of financial returns and occurrence of extreme scenarios.

JEL classification: C15, C16, E43, E59, G11, G12