Forecasting plausible scenarios and losses in interest rate targeting using mathematical optimization

Katsuhiro Tanaka ()
Additional contact information
Katsuhiro Tanaka: Keio University, Minato City, Tokyo 108-8345, Japan

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 03, 1-24

Abstract: This study proposes a mathematical optimization model for simultaneously forecasting plausible market scenarios and portfolio losses. Interest rates, volatilities and correlation coefficients can be modeled by the DCC-GARCH. A constraint condition is set by the Mahalanobis distance for deciding an acceptable range of change in interest rates. An objective function is set as a hypothetical market portfolio loss from delta, gamma and vega. The mathematical optimization model becomes a nonlinear programming problem for which it is difficult to find appropriate solutions. Therefore, the study introduces an original heuristic approach for preventing the signs of solutions from unintentionally becoming inverse. The study finds that, compared to a stressful scenario in Japan, the forecasting scenarios and losses are plausible.

Keywords: Risk management; mathematical optimization; stress test; uncertainty set; portfolio analysis (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786319500257
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:06:y:2019:i:03:n:s2424786319500257

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786319500257

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().