Interest rate term structure dynamics using PCA and GARCH models with application to the Philippine government curve
The Basle II Accord motivates a study of permissible internal models which can potentially decrease risk capital requirements. A PCA-GARCH interest rate risk model is considered. PCA is introduced to reduce dimensionality in the Philippine Government Curve. Volatility dynamics are modeled using diff...
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| Format: | text |
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Animo Repository
2005
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| Online Access: | https://animorepository.dlsu.edu.ph/etd_doctoral/100 |
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| Institution: | De La Salle University |
| Summary: | The Basle II Accord motivates a study of permissible internal models which can potentially decrease risk capital requirements. A PCA-GARCH interest rate risk model is considered. PCA is introduced to reduce dimensionality in the Philippine Government Curve. Volatility dynamics are modeled using different GARCH extensions. Finally, the selected PCA-GARCH model is tested under the Basle framework for market risk, using a representative fixed-income portfolio. Research findings show that a PCA-GARCH specified model can adequately capture the volatility dynamics in term structure of Philippine interest rates using two principal components and shows significant potential as an internal model for Value-at-Risk and Market Risk Capital under the Basle standard. |
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