A Two-Factor HJM Interest Rate Model for Use in Asset Liability Management

Sarp Kaya Acar, Ralf Korn, Kalina Natcheva-Acar and Jörg Wenzel

Chapter 3 in Asset and Liability Management Handbook, 2011, pp 62-76 from Palgrave Macmillan

Abstract: Abstract With regard to asset liability management (ALM), the future evolution of the interest rate market plays a major role. This is natural, as with a deterministic evolution of the interest rate (in fact, only in a deterministic setting we could speak of the interest rate!), interest rate risk would not play a role in ALM. However, as the main objective of ALM is to relate payments occurring at dif-ferent times in a suitable way, especially when the time horizon is large, assum-ing a deterministic interest rate evolution is absolutely inappropriate. Thus, finding a good model for the evolution of the term structure of interest rates is one of the main obstacles to overcome for successful ALM.

Keywords: Interest Rate; Implied Volatility; Short Rate; Interest Rate Risk; Interest Rate Model (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30723-0_3

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DOI: 10.1057/9780230307230_3

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