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What Short Rate Model Should I Use?

Speaker: Colin Turfus

CQF Institute is proud to bring you a free online talk with Colin Turfus on Tail Risk and What Short Rate Model Should I Use? 

Event Agenda 

17:30 - 18:00 GMT - Networking and CQF Booth 

18:00 - 19:30 GMT - CQF Institute Talk: Colin Turfus

19:30 - 20:00 GMT - Networking and CQF Booth 

This event can earn you up to 2 CPD credits.

Abstract

This talk will cover the development of short rate modelling of interest rates over the last thirty years, assessing the strengths and weaknesses of the various approaches which have been proposed. In particular we consider: 

- How analytically tractable is the model
- How well can it be fitted to market data, in particular volatility skew and smile and low/negative interest rate régimes?
- Can the model conveniently be extended to handle calculations involving compounded rates?
- Can it conveniently be extended to a multi-asset context to handle hybrid products?

Models rarely fare well in relation to more than two of the above criteria. Most tend also to be based on Gaussian underlying processes, with enhancements made by changing the volatility specification. We propose the more transparent approach of changing instead the functional dependence of the short rate on the Gaussian variable. This leads us to a new family of models which perform favourably in terms of all four of the above criteria. Also, within the family there is scope to trade accuracy of approximation and/or calibration quality for tractability, depending on the priorities of the user.

Speaker's Bio

Colin Turfus has worked for the last sixteen years as a financial engineer, investigating models for interest rate and credit derivatives and for counterparty risk. He is the author of a recently published monograph on Perturbation Methods in Credit Derivatives: Strategies for Efficient Risk Management and is currently working in Model Risk Management at Deutsche Bank. He lectured on C++ and Financial Engineering at City University, London for seven years. Prior to that Colin worked as a developer consultant in the mobile phone industry after an extended period in academia, teaching applied maths and researching in fluid dynamics, turbulent dispersion and astronomy.