Risk Management of Interest Rate Derivative Portfolios: A Stochastic Control Approach

Journal of Risk and Financial Management

Konstantinos Kiriakopoulos¹  Alexandros Koulis² 

[1] Department of Mathematics, National and Kapodistrian University of Athens, Panepistimioupolis, GR-157 04 Athens, Greece;Department of Business Administration, Technological Educational Institute of Central Greece, GR-344 00 Psahna, Evia, Greece; E-Mail:

关键词: stochastic portfolio optimization;    stochastic control;    interest rate derivatives;    sensitivity constraints;   

DOI  :  10.3390/jrfm7040130

来源: mdpi

【 摘 要 】

In this paper we formulate the Risk Management Control problem in the interest rate area as a constrained stochastic portfolio optimization problem. The utility that we use can be any continuous function and based on the viscosity theory, the unique solution of the problem is guaranteed. The numerical approximation scheme is presented and applied using a single factor interest rate model. It is shown how the whole methodology works in practice, with the implementation of the algorithm for a specific interest rate portfolio. The recent financial crisis showed that risk management of derivatives portfolios especially in the interest rate market is crucial for the stability of the financial system. Modern Value at Risk (VAR) and Conditional Value at Risk (CVAR) techniques, although very useful and easy to understand, fail to grasp the need for on-line controlling and monitoring of derivatives portfolio. The portfolios should be designed in a way that risk and return be quantified and controlled in every possible state of the world. We hope that this methodology contributes towards this direction.

【 授权许可】

CC BY   
© 2014 by the authors; licensee MDPI, Basel, Switzerland.