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Digital Library of the
European Council for Modelling and Simulation |
Title: |
Cost Simulation Of An
Inflation-Linked And A Floater Bond With Backtesting |
Authors: |
Kata Varadi, Agnes Vidovics-Dancs |
Published in: |
(2013).ECMS 2013 Proceedings edited
by: W. Rekdalsbakken, R. T. Bye, H. Zhang European Council for Modeling
and Simulation. doi:10.7148/2013 ISBN:
978-0-9564944-6-7 27th
European Conference on Modelling and Simulation, Aalesund, Norway, May 27th –
30th, 2013 |
Citation
format: |
Kata Varadi,
Agnes Vidovics-Dancs (2013). Cost Simulation Of An
Inflation-Linked And A Floater Bond With Backtesting, ECMS 2013 Proceedings edited by: W. Rekdalsbakken, R. T. Bye, H. Zhang, European Council for Modeling
and Simulation. doi:10.7148/2013-0275 |
DOI: |
http://dx.doi.org/10.7148/2013-0275 |
Abstract: |
In this paper we focus on
simulating and backtesting the costs of two special
government securities, from the point of view of the issuer. Our research has
two main goals. The first one is to assess the costliness of an inflation-linked
bond in comparison with a floater one. The second one is to backtest the simulation results on real market data. We
carry out the cost simulations with Monte Carlo simulation. The basis of the
calculations is the Cox-Ingersoll-Ross interest rate model for the floater
bond; and a first order autoregressive model for the
inflation-linked bond. Our findings are: (i) the inflation-linked
bond appears to be more expensive than the floater one and this relationship
holds true for exante (simulated) and ex-post
(actually realised) costs as well; and (ii) the
simulations predict the total present value of the costs adequately for both
instruments, but the individual cash flows of the floater bond are significantly
under- or overestimated in the different years. This shortcoming is in line
with our expectations, since the model is calibrated on a tranquil period but
applied on a very volatile one. |
Full
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