Interest Rates Term Structure under Ambiguity

Silvia Romagnoli and Simona Santoro
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Silvia Romagnoli: Department of Statistics, University of Bologna, Via Belle Arti 41, 40126 Bologna, Italy
Simona Santoro: Prometeia, Via G. Marconi 43, 40122 Bologna, Italy

Risks, 2017, vol. 5, issue 3, 1-29

Abstract: After financial crisis, the role of uncertainty in decision making processes has largely been recognized as the new variable that contributes to shaping interest rates and bond prices. Our aim is to discuss the impact of ambiguity on bonds interest rates (yields). Starting from the realistic assumption that investors ask for an ambiguity premium depending on the efficacy of government interventions (if any), we lead to an exponential multi-factor affine model which includes ambiguity as well as an ambiguous version of the Heath-Jarrow-Morton (HJM)model. As an example, we propose the realistic economic framework given by Ulrich ( 2008 , 2011 ), and we recover the corresponding ambiguous HJM framework, thus offering a large set of interest rate models enriched with ambiguity. We also give a concrete view of how different simulated scenarios of ambiguity can influence the economic cycle (through rates and bond prices).

Keywords: ambiguity; exponential affine model; multi-factor model (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:5:y:2017:i:3:p:50-:d:111938

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