Simulating interest rate structure evolution on a long term horizon a kohonen map application

摘要

In the 90s, a new approch to model risk was proposed and named Value at Risk (VaR). Pioneered by JP Morgan (RiskMetrics), VaP has initiated a lot of debate. One of the major shortcoming of RiskMetrics is its inability to generate scenarios on a long term horizon (the Monte-Carlo procedure proposed does not produce the classical mean-reverting properties of interest rate structure dynamics). In this paper, we propose an alternative approach, also based on a Monte-Carlo simulation procedure, but using a Kohonon map quantization to construct conditional probability distributions of interest rate structure shocks. The procedure is not only able to produce interest rate structure scenarios which are stable on a long term horizon (finve years) but also these scenarios exhibit properties compatible with the historical interest rate structure evolution used to compute the conditional probability distributions.