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Modeling Error Caused by Low Interest Rate—Pension Fund’s Interest Rate Model
Pension Fund,Low Interest Rate,Negative Interest Rate,Vasicek Model,Zero Lower Bound,
|Publication Year :||2017|
Pension funds have to obey several rules to allocate their fund. They can invest in risky asset only if their portfolio value is larger than pension fund’s liability value. Therefore the accuracy of pension fund’s liability estimating is very important which is decided by interest rate model. One of common interest rate model of pension fund is Vasicek model, which describes interest rate movements as a normal distribution’s randomness jump basing on its long term mean level. However this didn’t consist with historical data. In real market, there exists a lower bound which means interest rate cannot lower than it. In the past, the long term mean level of Vasicek model is far away from lower bound thus the modeling error is negligible. But the low interest rate environments caused by governments’ monetary policy let the long term mean level of Vasicek model close to zero and negative rate appears which is lower than lower bound, causing undesired modeling error.
In this paper, we modified Vasicek model by the idea of the lower bound and found the best investing method of pension fund by analyzing the performance of pension fund’s portfolio under certain rate path situation.
|Appears in Collections:||財務金融學系|
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