Bonne semence fait bon grain.
This chapter will describe yield curve evolution modelling in order to propose a practical implementation.
First, A/L managers do not speak about the yield curve model but about the model of the yield curve. There is not only one model and of course, there is not only one yield curve.
Interest rate models are developed in order to:
In this section, we will reconstitute the initial zero-coupon yield curve, i.e. we will model the market information in order to get a zero-coupon yield curve. Interest rate models will try to simulate the evolution of this curve as time passes.
To begin with, let us recall that the zero-coupon rates TZC introduced in Section 19.3 allowing for the computation of a fixed rate bond price V as the sum of its discounted cash flows :
There are indeed three major types of zero-coupon yield curves: