On Generating Scenarios For Bond Portfolios

Investments recommendations that result from scenario-based bond portfolio management models depend on the input scenarios which can be obtained in many different ways. Various aspects which influence the choice of representative scenarios for bond portfolio management, e.g., the sources of uncertainties and the level of the available information, will be discussed. The main factor which drives the returns, prices and other characteristics of bonds is the evolution of (short-term) interest rates. This is the main data process which enters the coefficients of the bond portfolio management models. We shall survey various discrete and continuous time interest rate models including their extensions to more dimensions and compare them from the point of view of their calibration, numerical tractability and properties of the obtained scenarios. Numerical experience based on data from the Italian market will be reported.