[Andrew Davidson amp; Co] Interest Rate Modeling - A Conscientious Choice教程.pdfVIP

. . S E V I T C E P S R E P E V I T A T I T N INTEREST RATE MODELING: A CONSCIENTIOUS CHOICE A U By ALEX LEVIN Q September 2002 INTEREST RATE MODELING: A CONSCIENTIOUS CHOICE By Alex Levin SEPTEMBER 2002 QUANTITATIVE PERSPECTIVES .. Introduction Intensive developments in the field of interest rate modeling have delivered a bold but confusing model selection choice for financial engineers, risk managers, and investment analysts. Do these modeling issues sound familiar? ! Should a mortgage bank assess the interest rate risk using the lognormal Black-Karasinski model or using the normal Hull- White model? ! Can a portfolio be hedged using different pricing models for assets and derivatives? ! Is there any historical evidence that one model is better than another? ! What does the market think about the interest rate distribution? (It must know something - otherwise how would the rate options be traded?) In this issue of Quantitative Perspectives, we show that selecting the best term structure model is becoming more of a conscientious task than a matter of taste. We show that both recent historical rates and implied volatility skew for swaptions confirm rate normalization and reject the conjecture of lognormality. We propose valuing mortgages using the Hull-White model, which can be quickly and accurately calibrated to both the yield curve and the swaption volatility matrix. Being fully aware of these market indications and tendencies, we have expanded and enhanced our VectorsTM suite of analytical models. Lognormality: The Old Days Those who read research on