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Risks 2017, 5(3), 50; doi:10.3390/risks5030050

Interest Rates Term Structure under Ambiguity

1
Department of Statistics, University of Bologna, Via Belle Arti 41, 40126 Bologna, Italy
2
Prometeia, Via G. Marconi 43, 40122 Bologna, Italy
*
Author to whom correspondence should be addressed.
Received: 30 July 2017 / Revised: 1 September 2017 / Accepted: 9 September 2017 / Published: 14 September 2017

Abstract

After financial crisis, the role of uncertainty in decision making processes has largely been recognized as the new variable that contributes to shaping interest rates and bond prices. Our aim is to discuss the impact of ambiguity on bonds interest rates (yields). Starting from the realistic assumption that investors ask for an ambiguity premium depending on the efficacy of government interventions (if any), we lead to an exponential multi-factor affine model which includes ambiguity as well as an ambiguous version of the Heath-Jarrow-Morton (HJM)model. As an example, we propose the realistic economic framework given by Ulrich (2008, 2011), and we recover the corresponding ambiguous HJM framework, thus offering a large set of interest rate models enriched with ambiguity. We also give a concrete view of how different simulated scenarios of ambiguity can influence the economic cycle (through rates and bond prices). View Full-Text
Keywords: ambiguity; exponential affine model; multi-factor model ambiguity; exponential affine model; multi-factor model
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Romagnoli, S.; Santoro, S. Interest Rates Term Structure under Ambiguity. Risks 2017, 5, 50.

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