Calculate and plot the average term structure of yield and its standard deviation.

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Download US treasury yields for multiple tenors over the time period of your choice from FRED’s web site

•Check data for gaps, sudden jumps, and other data quality issues

•Plot time series of the yields and their 1-day and 25-day increments

•Plot histograms of the 1-day and 25-day increments,  and fit several distributions to the histograms. Which distribution does provide the best fit?

•Calculate and plot the average term structure of yield and its standard deviation.

•What is the approximate relationship between the standard deviation of the 1-day and 25-day IR increments? How does it depend on the increment time periods, i.e. 1-day and 25-days? Does this relationship depend on the increment tenor?

•Plot correlation matrix between various tenors of the 1-day and 25-day increments.

•(Optional step) Calculate and plot three first principal components of the 1-day and 25-day increments. What percentage of the total yield variance do they explain?

•Fit a single factor stochastic model to the 1-day increments of each tenor and use it to simulate each tenor yield independently

•(Optional step) Fit a multifactor model, e.g. by Jamshidian and Zhu (1997), to the 1-day increments and use it to simulate the yields for all tenors simultaneouslyANALYSIS AND SIMULATION OF INTEREST RATES

 

 

FRED’s web site : https://fred.stlouisfed.org/series/DGS10

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