TY - JOUR
T1 - On the dynamics of treasury bond yields
T2 - From term structure modelling to economic scenario generation
AU - Hong, Yi
AU - Xu, Maochun
AU - Wen, Conghua
N1 - Publisher Copyright:
© 2024 Elsevier Ltd
PY - 2025
Y1 - 2025
N2 - This study proposes an algorithmic framework that integrates the dynamic modelling of the term structure of treasury bond yields with the generation of market-consistent economic scenarios. The unscented Kalman filter (UKF) that works as a non-linear learning instrument for historical bond yields under the multi-factor models can facilitate the in-sample yield curve modelling, underpinned by statistical inferences, and further enhance the performance of the out-of-sample bond pricing and yield predictability. Moreover, market views that gauge the holistic assessments of macroeconomic prospects are incorporated into our framework. As such, the market-consistent economic scenarios are driven primarily by the dynamics of the term structure of bond yields and aggregate market sentiments among investors, offering a new instrument for interest rate risk management.
AB - This study proposes an algorithmic framework that integrates the dynamic modelling of the term structure of treasury bond yields with the generation of market-consistent economic scenarios. The unscented Kalman filter (UKF) that works as a non-linear learning instrument for historical bond yields under the multi-factor models can facilitate the in-sample yield curve modelling, underpinned by statistical inferences, and further enhance the performance of the out-of-sample bond pricing and yield predictability. Moreover, market views that gauge the holistic assessments of macroeconomic prospects are incorporated into our framework. As such, the market-consistent economic scenarios are driven primarily by the dynamics of the term structure of bond yields and aggregate market sentiments among investors, offering a new instrument for interest rate risk management.
KW - Bias correction
KW - Economic scenario generation
KW - Multi-factor model
KW - Term structure modelling
KW - Unscented kalman filter (UKF)
UR - http://www.scopus.com/inward/record.url?scp=85214200093&partnerID=8YFLogxK
U2 - 10.1016/j.bar.2024.101542
DO - 10.1016/j.bar.2024.101542
M3 - Article
AN - SCOPUS:85214200093
SN - 0890-8389
JO - British Accounting Review
JF - British Accounting Review
M1 - 101542
ER -