Analyzing Yield Curve Risk for Path-Dependent Securities in a Multi-Factor Term Structure Framework

Bill Burns, Ph.D., Chris Ruan, Ph.D., and Ezequias Simon, Ph.D.

This paper introduces the G2++ multi-factor term structure model and its implementation within BondEdge for analyzing the yield curve risk associated with path dependent securities such as fixed-rate and adjustable-rate mortgages, floating rate notes, and prepayment sensitive structured securities. In addition, Quasi-Monte Carlo simulation techniques and model calibration to current market volatility are discussed. A comparison of calculated risk measures, such as option-adjusted spread and option-adjusted duration, with a single-factor model are also provided.