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An 11-Factor Heath, Jarrow And Morton Model For The Thai Government Bond Yield Curve: Implications For Model Validation

Published Fri, 17 Feb 2017 09:59:25 -0500 on Seeking Alpha

The author wishes to thank Prof. Robert A. Jarrow for 22 years of conversations on this topic.
This paper analyzes the number and the nature of factors driving the movements in the Thai government bond yield curve from September 15, 1999 through December 31, 2016. The process of model implementation reveals a number of important insights for interest rate modeling generally. First, model validation of observed yields is important because those yields are the product of a third-party curve fitting process that may produce spurious measures of interest rate volatility. Second, quantitative measures of smoothness and international comparisons of smoothness provide a basis for measuring data quality. Third, we outline a process for re-smoothing the raw data in a manner that preserves the maximum amount of true signal within that data. Finally, we illustrate the process for comparing stochastic volatility and affine models of the term structure. We conclude that the relatively short history of the data series in Thailand and the relatively narrow range of rate variation implies a constant volatility or "affine" specification, unlike other markets where stochastic volatility models have a superior fit.
An 11 Factor Heath, Jarrow and Morton Model for the
Thai Government Bond Yield Curve: Implications for Model Validation
Government yield curves are a critical input to the risk management calculations of major banks, insurance firms, fund managers,... Read more