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Term Structure Models in Multistage Stochastic Programming: Estimation and Approximation

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abstract This paper investigates some common interest rate models for scenario generation in financial applications of stochastic optimization. We discuss conditions for the underlying distributions of state variables which preserve convexity of value functions in a multistage stochastic program. One- and multi-factor term structure models are estimated based on historical data for the Swiss Franc. An analysis of the dynamic behavior of interest rates generated with these models reveals several deficiencies which have an impact on the performance of investment policies derived from the stochastic program. While barycentric approximation is used here for the generation of scenario trees, these insights may be generalized to other discretization techniques as well.
   
type journal paper
   
keywords Multistage Stochastic Programming, Asset & Liability Management, Barycentric Approximation, Non-Maturing Assets & Liabilities
   
language English
kind of paper journal article
date of appearance 1-12-2000
journal Annals of Operations Research
publisher Kluwer Academic Publishers (Dordrecht, NL)
ISSN 0254-5330
ISSN (online) 1572-9338
volume of journal 100
number of issue 1
page(s) 189-209
review double-blind review
   
citation Frauendorfer, K., & Schürle, M. (2000). Term Structure Models in Multistage Stochastic Programming: Estimation and Approximation. Annals of Operations Research, 100(1), 189-209.