ALM modeling

Mitor

New Member
Hello
I would like to have some guide in the literature of ALM modelling. Currently I have used a one factor CIR to model interest rate for Economic Capital. For what I understand, in order to upgrade this model such that we can possible have a tilt movement for the IR a two factor model like the CIR2++ or G2++ model should be used. The actual model is calibrated using historical data since we are interested in long term estimation not pricing.
Another related topic I´m interested in, is the literature on the difference between equilibrium models and no arbitrage models and risk and real world probability and the different applications for trading and banking. I have only found a transcription of an interview of McNatt where they cite the paper "The four faces of interest rate models" but have not found this one for free.
Thank you
 
Last edited:

Bid Shader

New Member
With respect to your "Another related topic...", I remember that Francis Diebold discussed a paper at a conference about 10 years ago on issues related to this. I glanced at his website and am pretty sure it's this one:

http://www.ssc.upenn.edu/~fdiebold/papers/paper64/DPR-AEApaperNBER.pdf

"New aspects of the macro/finance interface as embodied in yield curve modeling. The tension between current finance approaches that have the theoretically appealing property of freedom from arbitrage but forecast poorly, and traditional macroeconomic approaches that admit arbitrage but forecast well. A step toward resolving the tension: making Nelson-Siegel arbitrage-free."

Hope that helps.
 
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