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kladivko
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Posts: 13
Joined: August 2nd, 2004, 4:34 pm

Interest Rate Modelling

August 3rd, 2004, 9:40 am

I would like to model Interest Rates (e.g. Libor). I know about Vasicek, CIR, etc. models but it seems to me that this models are only suitable for pricing, not for any predictions. Am I right? If I can use them for modelling (predictions) not pricing, can I get their parameters (calibrate them) using only interst rates historical data (e.g. Libor historical data)? I have always found calibration via different products - bonds, options...Thanks in advance for any help.
 
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Aaron
Posts: 6433
Joined: July 23rd, 2001, 3:46 pm

Interest Rate Modelling

August 3rd, 2004, 8:45 pm

It depends what you want to predict.If you just want a probability distribution of 1-month LIBOR one year from today, you don't need a complicated model. You could look at historical data, comparing 1-month LIBOR at time t with 1-month LIBOR and 12-months-forward 1-month LIBOR; both from a year earlier. If that wasn't accurate enough, you could bring in other explanatory variables.The trouble is if you want to predict combinations of interest rates, say 1-month and 3-month LIBOR one year from today; or the move in 1-month LIBOR 1 years from today versus 2 years from today; or the correlation between 1-month LIBOR moves and 3-month LIBOR moves. Then you need a model of interest rates.Generally you have a choice between models that are accurate about interest rate movements and models that give realistic yield curves. Depending on your application you might prefer one or the other.
 
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Siberian
Posts: 298
Joined: June 25th, 2003, 8:56 pm

Interest Rate Modelling

August 13th, 2004, 3:48 pm

you should try black-derman and toy model, it requires calibration to the current interest levels
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

Interest Rate Modelling

August 13th, 2004, 4:00 pm

what do you want to predict? the yield curve? no need to employ a term structure model, just look at fwd yields (good enough)
 
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kladivko
Topic Author
Posts: 13
Joined: August 2nd, 2004, 4:34 pm

Interest Rate Modelling

August 16th, 2004, 11:49 am

Actually I would like to use the models for VaR, more specifically - as a Government Bond Issuer - for estimating possible future cupon cost of the state debt. So far I have used historical simulation which gives good results but Interest Rates models seems to be more sophisticated.Than You for all Your replies.
 
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mj
Posts: 3449
Joined: December 20th, 2001, 12:32 pm

Interest Rate Modelling

August 16th, 2004, 1:55 pm

we developed a real-world model for var type stuff. you can download the paper from www.rebonato.com
 
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Aaron
Posts: 6433
Joined: July 23rd, 2001, 3:46 pm

Interest Rate Modelling

August 17th, 2004, 10:03 pm

Most interest rate models do not give good distributions of future interest rates. As you say, they are designed for pricing, not prediction. I think either historical data or macro-economic simulation would give better results. Modeling would be useful as an adjunct to those things, but I wouldn't rely on it for the main calculation.
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