53 records from EconBiz based on author Name

1. Managing Interest Rate Risk : The Next Challenge?

abstract

Are the managers of financial institutions ready for the small but increasingly significant risk of inflation in the near future, due to the unprecedented fiscal and monetary responses of the U.S. government to prevent an economic collapse? This paper addresses this important issue by reviewing important findings in the area of interest rate risk management. We discuss five classes of models in the fixed income literature that deal with hedging the risk of large, non-parallel yield curve shifts. These models are given as M-Absolute/M-Square models, duration vector models, key rate duration models, principal component duration models, and extensions of these models for fixed income derivatives, for valuing and hedging bonds, loans, demand deposits, and other fixed income instruments. These models can be used for designing various hedging strategies such as portfolio immunization, bond index replication, duration gap management, and contingent immunization, to protect against changes in the height, slope, and curvature of the yield curve. We argue that the current regulatory models proposed by the U.S. Federal Reserve, the Office of Thrift Supervision, and the Bank of International Settlements, may understate the true interest rate risk exposure of financial institutions, if sharp increases in interest rates lead to higher default risk and quickening of the pace of deposit withdrawals

Nawalkha, Sanjay K.; Soto, Gloria M.;
2020
Availability: Link Link
Citations: 2 (based on OpenCitations) Cited By

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2. Generalized M-Vector Models for Hedging Interest Rate Risk

abstract

This paper generalizes the M-square and M-vector models (Fong and Fabozzi [1985] and Nawalkha and Chambers [1997]) by using a Taylor series expansion of the bond return function with respect to simple polynomial functions of the cash flow maturities. The classic M-vector computes the weighted averages of the distance between the maturity of each cash flow and the portfolio horizon, raised to integer powers (e.g., (t - H)^1, (t - H)^2, (t - H)^3, etc.). Implementation of the new approach involves computing the weighted averages of the distance between some polynomial function of the maturity of each cash flow and that of the portfolio horizon, raised to integer powers (e.g., (t^0.5 - H^0.5)^1, (t^0.5 - H^0.5)^2, (t^0.5 - H^0.5)^3, etc.). We test six different generalized M-vector models corresponding to six different polynomial functions. It is shown that polynomial functions of lower power (i.e., 0.25 or 0.5) provide significantly enhanced protection from interest rate risk, when higher-order generalized M-vector models are used

Nawalkha, Sanjay K.; Soto, Gloria M.; Zhang, Jun;
2020
Availability: Link Link

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3. Multifactor Models for Managing Interest Rate Risk

abstract

How do the managers of financial institutions hedge against the effects of non-parallel yield curve shifts? This paper addresses this important issue by reviewing the important findings in the area of interest rate risk management over the past two decades. We discuss four classes of models in the fixed income literature that deal with hedging the risk of large, non-parallel yield curve shifts. These models are given as M-Absolute/M-Square models, duration vector models, key rate duration models, and principal component duration models. These models can be used for designing various passive strategies such as portfolio immunization, bond index replication, and duration gap management; and hybrid strategies (i.e., active/passive) such as targeted yield curve shifts speculation (based on change in either the height, and/or the slope, and/or the curvature of the yield curve) and contingent immunization

Nawalkha, Sanjay K.; Soto, Gloria M.;
2020
Availability: Link Link

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4. Term Structure Estimation

abstract

The term structure of interest rates gives the relationship between the yield on an investment and the term to maturity of the investment. Since the term structure is typically measured using default-free, continuously-compounded, annualized zero-coupon yields, it is not directly observable from the published coupon bond prices and yields. This paper focuses on how to estimate the default-free term structure of interest rates from bond data using three methods: the bootstrapping method, the McCulloch cubic-spline method, and the Nelson and Siegel method. Nelson and Siegel method is shown to be more robust than the other two methods. The results of this paper can be implemented using user-friendly Excel spreadsheets

Nawalkha, Sanjay K.; Soto, Gloria M.;
2020
Availability: Link Link
Citations: 2 (based on OpenCitations) Cited By

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5. Pricing American Interest Rate Options Under the Jump-Extended Vasicek Model

abstract

This paper shows how to price American interest rate options under the exponential jumps-extended Vasicek model, or the Vasicek-EJ model. We modify the Gaussian jump-diffusion tree of Amin [1993] and apply to the exponential jumps-based short rate process under the Vasicek-EJ model. The tree is truncated at both ends to allow fast computation of option prices. We also consider the time-inhomogeneous version of this model, denoted as the Vasicek-EJ model that allows exact calibration to the initially observable bond prices. We provide an analytical solution to the deterministic shift term used for calibrating the short rate process to the initially observable bond prices, and show how to generate the jump-diffusion tree for the Vasicek-EJ model. Our simulations show fast convergence of European option prices obtained using the jump-diffusion tree, to those obtained using the Fourier inversion method for options on zero-coupon bonds (or caplets), and the cumulant expansion method for options on coupon bonds (or swaptions)

Beliaeva, Natalia; Nawalkha, Sanjay K.; Soto, Gloria M.;
2019

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6. Factores determinantes de las primas de riesgo soberanas

Mateo Carreras, Manuel; Soto, Gloria M.;
2016
Type: Aufsatz in Zeitschrift; Article in journal;

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7. Determinants of interest rate exposure of Spanish banking industry

Ballester, Laura; Ferrer, Román; González, Cristóbal; Soto, Gloria M.;
2009
Type: Arbeitspapier; Working Paper; Graue Literatur; Non-commercial literature;
Availability: Link

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8. Un estudio empírico de transmisión monetaria en Europa

Prats, María A.; Soto, Gloria M.;
2006
Type: Arbeitspapier; Working Paper; Graue Literatur; Non-commercial literature;
Availability:

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9. A New Taxonomy of the Dynamic Term Structure Models

abstract

This paper gives a new taxonomy of dynamic term structure models that classifies all existing TSMs as either fundamental models or preference-free single-plus, double-plus, and triple-plus models. We exemplify the new taxonomy by considering preference-free versions of some well-known fundamental short rate models. Single-plus extensions of the fundamental models are shown to be both time-homogeneous and preference-free - two characteristics which do not simultaneously hold under any existing class of TSMs. Though the analytical apparatus for pricing fixed income securities is identical under fundamental models and single-plus models, the latter models are consistent with general non-linear forms of MPRs which may also depend upon an arbitrary set of state variables, leading to better estimates of risk-neutral parameters. The preference-free double-plus and triple-plus extensions of the fundamental models are similar to the Heath, Jarrow, and Morton [1992] models, in that time-inhomogeneous drifts and volatilities are used as quot;smoothing variablesquot; to fit the initial bond prices and initial term structure of volatilities, respectively

Nawalkha, Sanjay K.; Beliaeva, Natalia; Soto, Gloria M.;
2010
Availability: Link Link
Citations: 6 (based on OpenCitations) Cited By

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10. Determinants of interest rate exposure of Spanish banking industry

Pacheco, Gloria M. Soto; González, Cristóbal; Ballester, Laura; Ferrer, Román;
2009
Availability:

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