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Measurement of interest rates using a convex optimization model

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  • Blomvall, Jörgen

Abstract

Measurement of a single interest rate curve is an important and well-studied inverse problem. To select plausible interest rate curves from the infinite set of possible interest rate curves, forward rates should be used in the regularization. By discretizing the interest rate curve it is shown that the inverse problem can be reformulated as a convex optimization model that can be efficiently solved using existing solvers. The convex optimization model can include bills, bonds, certificates of deposits, forward rate agreements and interest rate swaps using both equality constraints and inequality constraints that stem from bid/ask prices. The importance of an appropriate regularization and allowing for deviations from market prices to obtain stable forward rate curves is illustrated using market data.

Suggested Citation

  • Blomvall, Jörgen, 2017. "Measurement of interest rates using a convex optimization model," European Journal of Operational Research, Elsevier, vol. 256(1), pages 308-316.
    • Handle: RePEc:eee:ejores:v:256:y:2017:i:1:p:308-316
    DOI: 10.1016/j.ejor.2016.05.053
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    References listed on IDEAS

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    8. Gauthier, Geneviève & Simonato, Jean-Guy, 2012. "Linearized Nelson–Siegel and Svensson models for the estimation of spot interest rates," European Journal of Operational Research, Elsevier, vol. 219(2), pages 442-451.
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    Cited by:

    1. Blomvall, Jörgen & Hagenbjörk, Johan, 2019. "A generic framework for monetary performance attribution," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 121-133.
    2. Johan Hagenbjörk & Jörgen Blomvall, 2019. "Simulation and evaluation of the distribution of interest rate risk," Computational Management Science, Springer, vol. 16(1), pages 297-327, February.
    3. Blomvall, Jörgen & Hagenbjörk, Johan, 2022. "Reducing transaction costs for interest rate risk hedging with stochastic programming," European Journal of Operational Research, Elsevier, vol. 302(3), pages 1282-1293.
    4. El Hachloufi Mostafa & Ezouine Driss & El Haddad Mohammed, 2018. "Interaction between the VaR of cash flow and the interest rate using the ALM," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 7(1), pages 1-4.
    5. Jörgen Blomvall & Jonas Ekblom, 2018. "Corporate hedging: an answer to the “how” question," Annals of Operations Research, Springer, vol. 266(1), pages 35-69, July.

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