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Journal Articles European Journal of Operational Research Year : 2016

Kriging of financial term-structures

Abstract

Due to the lack of reliable market information, building financial term-structures may be associated with a significant degree of uncertainty. In this paper, we propose a new term-structure interpolation method that extends classical spline techniques by additionally allowing for quantification of uncertainty. The proposed method is based on a generalization of kriging models with linear equality constraints (market-fit conditions) and shape-preserving conditions such as monotonicity or positivity (no-arbitrage conditions). We define the most likely curve and show how to build confidence bands. The Gaussian process covariance hyper-parameters under the construction constraints are estimated using cross-validation techniques. Based on observed market quotes at different dates, we demonstrate the efficiency of the method by building curves together with confidence intervals for term-structures of OIS discount rates, of zero-coupon swaps rates and of CDS implied default probabilities. We also show how to construct interest-rate surfaces or default probability surfaces by considering time (quotation dates) as an additional dimension.
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Dates and versions

hal-01206388 , version 1 (30-09-2015)
hal-01206388 , version 2 (07-04-2016)

Identifiers

Cite

Areski Cousin, Hassan Maatouk, Didier Rullière. Kriging of financial term-structures. European Journal of Operational Research, 2016, 255 (2), pp.631-648. ⟨10.1016/j.ejor.2016.05.057⟩. ⟨hal-01206388v2⟩
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