Early exercise decisions under uncertainty and stochastic interest rates

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The performance of deterministic and stochastic interest rate risk measures : Another Question of Dimensions?

Publication . Oliveira, Luís; Nunes, João Pedro Vidal; Malcato, Luís

The efficiency of traditional and stochastic interest rate risk measures is compared under one-, two-, and three-factor no-arbitrage Gauss-Markov term structure models, and for different immunization periods. The empirical analysis, run on the German Treasury bond market from January 2000 to December 2010, suggests that: i) Stochastic interest rate risk measures provide better portfolio immunization than the Fisher-Weil duration; and ii) The superiority of the stochastic risk measures is more evident for multi-factor models and for longer investment horizons. These findings are supported by a first-order stochastic dominance analysis, and are robust against yield curve estimation errors.

2014-12Artigo científico

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Entidade financiadora

Fundação para a Ciência e a Tecnologia

Programa de financiamento

3599-PPCDT

Número da atribuição

PTDC/EGE-ECO/099255/2008