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Information and Accuracy in Interest-Rate-Risk Simulation

by Mike Carhill

OCC Working Paper 94-7, October 1994.

Abstract

Accurate interest-rate-risk modelling requires detailed information, but information is costly. By assessing the rate-sensitivity estimates from models that require differing degrees of detail, we calculate the marginal improvements in accuracy that result from marginal increments of informational detail. We limit the analysis to the instruments most commonly held by financial intermediaries.

Surprisingly, for most of those instruments, we can discriminate between model estimates with great precision. As a corollary, a high degree of model precision appears to be possible, provided that sufficiently detailed data are used. However, this precision holds only if the models' underlying assumptions are granted, and it is not easy to discriminate among alternative underlying assumptions. Therefore, model precision does not imply model accuracy.

Disclaimer

As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.

Any whole or partial reproduction of material in this paper should include the following citation: Carhill, Mike, "Information and Accuracy in Interest-Rate-Risk Simulation," Office of the Comptroller of the Currency, E&PA Working Paper 94-7, October 1994.

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