Modeling the Evolution of Interest Rates: The Key to DFA Asset Models

Fluctuations in short term and long term interest rates can have significant impact on insurer financial results. Hence projecting the probabilities of these possible fluctuations is an important step towards a credible dynamic financial analysis. Changes in the level of interest rates as well as shifts in the shape of the yield curve both need to be modeled. Such shape-shifting is not an unconstrained random process – there are relationships among the yields of different terms – yet a good deal of flexibility is required to be able to reproduce historical curves.