Multistage Stochastic Programming: Barycentric Approximation

23. Refinancing Mortgages in Switzerland

“…According to our experience, models for a planning horizon of several years should be calibrated to a historical data set that covers at least an economic cycle. In can also be helpful to assess a term structure model by comparing scenarios generated in a simulation study with the characteristics of empirically observed data, as suggested by Frauendorfer and Schürle [17].…”

“…However, the latter can be solved analytically only for some special cases. Example are models of the affine type where all K factors (i) follow a process of the form (23.5) with identical exponent γ ∈ {0, 0.5}, (ii) are orthogonal, and (iii) sum up to the instantaneous rate r t , i.e., the yield for an infinitely short holding period [17].…”

Barycentric Bounds in Stochastic Programming: Theory and Application

“…It now remains to specify the stochastic processes that drive the evolution of interest rates and volume. Empirical studies imply that two factors explain most of the volatility of the term structure, and that these factors can be chosen as the level η l of the yield curve, e.g., in terms of the rate for an infinite maturity, and the spread η s between the instantaneous short rate and the level factor (see for example [32]). For the ease of exposition, we apply a simplified discrete-time term structure model, in which the stochastic changes of the factors are given by…”

A portfolio-based evaluation of affine term structure models

“…A recent example in the bond literature is Frauendorfer and Schürle (2001) which finds conflicting results in an application to the Swiss bond market. The authors show that the onefactor Vasicek (1977) model is preferred to both the one-factor CIR (1985) model and twofactor models from a statistical standpoint (log likelihood maximization) as well as based on its financial performance, even though two-factor models seem to better characterize yields' empirical distribution.…”