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The Markov Chain Interest Rate Scenario Generator Revisited, Sarah L.M. Christiansen

Journal of Actuarial Practice (1993-2006)

This paper furthers the development of the Markov chain interest rate generator. Though the basic technique remains essentially unchanged, there are still many significant changes to the model. For example: (i) the long (key) rates are now are generated by a mean reversionary process; (ii) the number of shapes is increased from seven to 11; (iii) the limitation of changing by only two shape codes per year is removed; and (iv) the random walk matrix that determines the shapes is revised to be more realistic. An algorithm is developed to determine the shape code of the original yield curve, thus …