Kriging of financial term-structures
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Publication:323575
DOI10.1016/J.EJOR.2016.05.057zbMATH Open1346.91264arXiv1604.02237OpenAlexW2265044661MaRDI QIDQ323575FDOQ323575
Authors: Areski Cousin, Hassan Maatouk, Didier Rullière 
Publication date: 7 October 2016
Published in: European Journal of Operational Research (Search for Journal in Brave)
Abstract: Due to the lack of reliable market information, building financial term-structures may be associated with a significant degree of uncertainty. In this paper, we propose a new term-structure interpolation method that extends classical spline techniques by additionally allowing for quantification of uncertainty. The proposed method is based on a generalization of kriging models with linear equality constraints (market-fit conditions) and shape-preserving conditions such as monotonicity or positivity (no-arbitrage conditions). We define the most likely curve and show how to build confidence bands. The Gaussian process covariance hyper-parameters under the construction constraints are estimated using cross-validation techniques. Based on observed market quotes at different dates, we demonstrate the efficiency of the method by building curves together with confidence intervals for term-structures of OIS discount rates, of zero-coupon swaps rates and of CDS implied default probabilities. We also show how to construct interest-rate surfaces or default probability surfaces by considering time (quotation dates) as an additional dimension.
Full work available at URL: https://arxiv.org/abs/1604.02237
Recommendations
Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70) Interest rates, asset pricing, etc. (stochastic models) (91G30)
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