Simulation of Fixed-income
Portfolios Using Grids
Adnan Chishti
We consider the application of low-dimensional grids to the simulation of complex
fixed-income portfolios. We describe the grid simulation methodology and present
a rigorous testing framework to measure and decompose the approximation errors.
The methodology is illustrated by a case study of a callable bond portfolio. We
demonstrate that grids provide reasonably accurate non-parametric VaR estimates
while substantially reducing the computational time required.
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41
VOL. 2, NO. 2 JUNE 1999
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ALGO RESEARCH QUARTERLY
9D5
45
JUNE 1999
Simulation using grids
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46
JUNE 1999
Simulation using grids
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JUNE 1999
Simulation using grids
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ALGO RESEARCH QUARTERLY
48
JUNE 1999
Simulation using grids
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References
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7
7
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Errors
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Appendix
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Definition of grids
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ALGO RESEARCH QUARTERLY
I ( [ ) – I ( [ˆ )
49
JUNE 1999
Simulation using grids
Error measures
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ALGO RESEARCH QUARTERLY
50
JUNE 1999