Barrie & Hibbert Knowledge Base

Multi Year Real-World Interest Rates: Updating E2FBK, 2F Vasicek and Inflation Plus Calibrations

2012-05-17T09:54:37Z

This note outlines our methodology for the real world calibration of 2-Factor Vasicek, E2FBK and Inflation-Plus models for real, nominal and inflation rates respectively. We describe how a set of model parameters can be derived which produce an optimal fit to our real-world distributional targets [Jessop & Liu, Apr 2012]. In this calibration approach, all eight real and nominal volatility and speed of mean reversion parameters are calibrated, along with two real and nominal correlation parameters and the inflation shock dispersion.

Real world interest rate targets - long term distributional targets

2012-04-30T09:26:11Z

In this note we explain our methodology for setting long term distributional targets for nominal, real interest rates and inflation. Where available we use data going back to 1900. As we have limited market data available for real interest rates and inflation expectations we construct pseudo market prices to gain insight into suitable distribution targets for these rates.

Real-World Equity Calibration: Distributional targets at End-March 2012

2012-04-05T08:33:21Z

This note provides an update to our real-world volatility, correlation and risk premium assumptions for global equity markets at end-March 2012. In our view, the assumptions presented here provide a set of feasible real-world calibration targets. Please note that these targets may not be precisely matched by specific model calibrations. In general models offer fewer degrees of freedom than the number of targets documented here. As a result, the actual choice of the calibration targets used in the fitting process is described in the model calibration documentation.

LMM+ Calibration Method

2012-03-22T10:12:00Z

This document describes the market-consistent (MC) calibration of the LMM+ model. The model, its parameters, its implementation and the pricing of swaption contracts are discussed in the Model Definition (MD) document.

End March 2012 Calibrations Pre-Calibration note

2012-03-20T14:42:22Z

This note sets out the planned delivery schedule for our 31st March 2012 ESG calibrations. In addition, we provide details of the changes to our calibration methodology and coverage.

End March 2012 Calibrations Pre-Calibration note

2012-03-20T14:42:09Z

This note sets out the planned delivery schedule for our 31st March 2012 ESG calibrations .In addition, we provide details of the changes to our calibration methodology and coverage.

Real World Market Consistent Equity Calibration: Dividend Yield Targets End December 2011

2012-03-16T11:53:29Z

This note provides an update (Dec2011) to our real-world/market-consistent equity dividend yield model assumptions. The assumptions will be used in the ESG modelling of parent equity assets (E_Economy) and are therefore thought to be applicable for well-diversified portfolios of large and mid-cap stocks. The methodology is explained in the document “Calibrating the Dividend Yield Model?

Real World Equity Calibration Update for Stochastic Volatility Parameters

2012-03-05T12:58:05Z

This document presents the parameter updates for the stochastic volatility model. They are used to generate targets for equity excess returns at intermediate time horizons and for the direct calibration of our Real-World SVJD model. The assumptions underlying this analysis are thought to be applicable for a well-diversified portfolio of large and mid-cap stocks.

Real World Equity Calibration Key Equity Volatility Assumptions

2012-03-05T12:50:03Z

This note provides an update of the assumptions used when setting forecasts for equity (realised) volatility in developed and emerging economies. It is based on the original methodology outlined in El Cherif (2009b) and El Cherif (2010).

Risk-neutral Valuation and Stochastic Interest Rates

2012-01-18T15:03:49Z

In this note we give an intuitive presentation of risk-neutral valuation in the specific context of valuing interest-rate derivatives using a stochastic interest rate model. We attempt to explain the sometimes counterintuitive result that such models can produce scenarios of extremely high interest rates, far in excess of real world expectations.

Real-World equity calibration: distributional targets at end-December 2011

2012-01-05T13:02:59Z

This note provides an update to our real-world volatility, correlation and risk premium assumptions for global equity markets at end-December 2011. In our view, the assumptions presented here provide a set of feasible real-world calibration targets. Please note that these targets may not be precisely matched by specific model calibrations. In general models offer fewer degrees of freedom than the number of targets documented here. As a result, the actual choice of the calibration targets used in the fitting process is described in the model calibration documentation.

Financial markets in 2011

2012-01-05T10:38:11Z

Hopes for global economic recovery were dashed in the second half of 2011 as the Eurozone debt crisis spiralled out of control. Regional leaders failed in their attempts to appease financial markets and to shore up faith in the single currency. Given the deterioration of the economic situation through 2011 the global economy now faces significant challenges over the coming year and financial institutions are once again exposed to major risks.

The Financial Market Update summarises key developments in global financial markets over 2011. Many of our ESG models are calibrated taking into account current market conditions; this report offers insights into the key areas in which this calibration is likely to differ from End December 2010 and examines the financial economic drivers behind such changes.

LMMPlus Model Definition

2011-12-23T10:27:23Z

This document describes the LMM+ model, its underlying stochastic differential equations and the swaption pricing technique.

Barrie & Hibbert Market-consistent Interest Rate Models: A Comparison

2011-12-23T09:33:50Z

This document summarises the key features of each of Barrie & Hibbert's modelling choices for nominal interest rates in a market-consistent context.

Swiss Stress Disorder

2011-12-16T09:38:18Z

Given the flight from distressed and risky currency to safer assets as a consequence of the Euro zone currency fiasco together with the Swiss central bank’s policy response, the Swiss Franc and domestic interest rates have been subject to extraordinary pressure during 2011. This short note compares the moves in CHF government interest rates through to end-September with our projections at the beginning of the year.