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Scenario generation for long run interest rate risk assessment

Robert Engle, Guillaume Roussellet () and Emil Siriwardane

Journal of Econometrics, 2017, vol. 201, issue 2, 333-347

Abstract: We propose a statistical model of the term structure of U.S. treasury yields tailored for long-term probability-based scenario generation and forecasts. Our model is easy to estimate and is able to simultaneously reproduce the positivity, persistence, and factor structure of the yield curve. Moreover, we incorporate heteroskedasticity and time-varying correlations across yields, both prevalent features of the data. The model also features a regime-switching short-rate model. We evaluate the out-of-sample performance of our model in terms of forecasting ability and coverage properties, and find that it improves on the standard Diebold and Li model.

Keywords: Yield curve forecast; Risk management; Scenario simulation; Switching regimes (search for similar items in EconPapers)
JEL-codes: C53 C58 C22 G12 (search for similar items in EconPapers)
Date: 2017
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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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Handle: RePEc:eee:econom:v:201:y:2017:i:2:p:333-347