Interest rate & inflation modelling

D. Hainaut, PhD

Description

This course explores the modelling of interest rate and inflation.

The first part focuses on the static modelling of the yield curve. We review the Nelson-Siegel, Svensson and Smith-Wilson models. The last one is now a standard in the insurance industry and is recommended by Solvency II.

The second part of this course reviews popular stochastic interest rate models: Hull&White, Heath-Jarrow-Morton and G2++. It does not aim to be exhaustive and focuses on Gaussian factor models for interest or forward rates. This choice is motivated by the high level of analytical tractability of these models.

The last section covers inflation modeling after a brief presentation of hedging tools for inflation. We focus on the Jarrow-Yildirim model based on a foreign currency analogy between real and nominal economies.

Throughout this course, a particular attention is granted to the econometric estimation of these models and to their use in risk management. The module is illustrated with examples in R provided to participants.

Program

  1. Introduction
    • Bond market
    • Bootstrapping
    • Money market
    • Forward rates
    • Instantaneous forward rates
  2. Statistic modelling
    • Nelson-Siegel model
    • Svensson model
    • Smith-Wilson model
    • Smith-Wilson estimation
    • Smith-Wilson & Solvency II

  3. Stochastic calculus in a nutshell

    • Brownian motion and Itô’s lemma

    • Risk neutral measure

  4. Short rate models

    • Hull & White model

    • Estimation under P and Q

    • Option on ZC and CB bonds

    • Swaptions

    • Trinomial tree

  5. Heath Jarrow Morton

    • Definition and properties

    • Econometric estimation

    • Illustration

    • Simulations

  6. The 2 additive factor Gaussian model G2++

    • Definition & properties

    • Bond prices

    • Estimation under P

    • Bond options

  7. Inflation modelling

    • Inflation

    • Inflation bond : OATi

    • ZC inflation indexed swaps

    • Year to year inflation swaps

    • Jarrow Yildirim model

    • Econometric estimation of JY

Speaker

Donatien Hainaut

Donatien Hainaut

Scientific Advisor, Detralytics
Professor, UCLouvain

Date : On-Demand

Duration : 9h

Accreditation : 9CPD | 54PPC

Industry : Bank, insurance

Requirements : R studio, Basic knowledge of financial markets

Make a Request

Acquired skills

At the end of the training, participants will be able to:

  • Implement and fit a static yield curve model;
  • Implement Gaussian stochastic model for interest rates;
  • Estimate parameters from time-series;
  • Price interest rate derivatives such options on bonds and swaptions, notably with trinomial trees;
  • Implement and fit the Jarrow-Yildirim model for inflation.

About our Speakers

Donatien Hainaut

Donatien Hainaut is a Scientific Advisor at Detralytics and a professor at UCLouvain (Belgium), where he serves as the Director of the Master’s program in Data Science with a statistical orientation. Prior to this, he held several academic positions, including Associate Professor at Rennes School of Business and ENSAE in Paris. He also has extensive industry experience, having worked as a Risk Officer, Quantitative Analyst, and ALM Officer.

Donatien is a Qualified Actuary and holds a PhD in the field of Asset and Liability Management. His current research focuses on contagion mechanisms in stochastic processes and the applications of neural networks in insurance.

All Trainings