[Uwgarp-commits] r189 - pkg/GARPFRM/sandbox

[noreply at r-forge.r-project.org]

Author: tfillebeen
Date: 2014-06-14 01:32:18 +0200 (Sat, 14 Jun 2014)
New Revision: 189

Modified:
   pkg/GARPFRM/sandbox/principleComponent.R
   pkg/GARPFRM/sandbox/test_discountFactorArbitrage.R
Log:
duration hedge

Modified: pkg/GARPFRM/sandbox/principleComponent.R
===================================================================
--- pkg/GARPFRM/sandbox/principleComponent.R	2014-06-13 16:37:10 UTC (rev 188)
+++ pkg/GARPFRM/sandbox/principleComponent.R	2014-06-13 23:32:18 UTC (rev 189)
@@ -2,10 +2,33 @@
 library(psych)
 library(GPArotation)
 
+######### Applying duration as a hedge
+# #1: Initialize the Discount Factors (DF)
+DF_1 = rbind(0.968,0.9407242,0.9031545,0.8739803)
+# Choose a 2 year bond with semiannual payments to match number of bond prices and CFs
+time = seq(from=0.5, to=2, by=0.5)
+# First define a bond object to be used throughout the analysis, where m is the compound frequency
+bond_1 = bondSpec(time, face=100, m=2, couponRate = 0.0475)
+# Duration measures the effect of a small parallel shift in the yield curve
+mDuration_1 = bondDuration(bond_1,DF_1)
+# # 2: Initialize the Discount Factors (DF)
+DF_2 = rbind(0.95434,0.9434,0.917232,0.89,0.85678,0.8396,0.81242,0.7921,0.7693,0.7473,0.7298,0.7050)
+# Choose a 2 year bond with semiannual payments to match number of bond prices and CFs
+time = seq(from=0.5, to=6, by=0.5)
+# First define a bond object to be used throughout the analysis, where m is the compound frequency
+bond_2 = bondSpec(time, face=100, m=2, couponRate = 0.0475)
+# Duration measures the effect of a small parallel shift in the yield curve
+mDuration_2 = bondDuration(bond_2,DF_2)
+# Hedging Ratio: for every bond_2 used there needs to be hedgeRatio amount of bond_1s
+hedgeRatio = mDuration_2/mDuration_1
+
+
+# Load Data for historcal analysis tools
 data(crsp.short)
 data = largecap.ts[,2:6]
 head(data)
 
+
 # Empirical application: Linear hedge estimation 
 # OLS Level-on-Level regression 
 deltas = linearHedge(data[,1],data[,2:5])
@@ -16,11 +39,6 @@
 hedgedInstruments = data%*%deltas
 plot(hedgedInstruments, type="l", main = "Hedged Price Difference", xlab="Time",ylab="Difference")
 
-
-######### Applying duration as a hedge######## TO-DO
-
-
-
 # Have a single, empirical description of the behavior of the term structure that can be applied across all
 # assets. Principal Compnents (PCs) provide such an emperical description 
 # Retain components that combined account for x% of the cumulative variance

Modified: pkg/GARPFRM/sandbox/test_discountFactorArbitrage.R
===================================================================
--- pkg/GARPFRM/sandbox/test_discountFactorArbitrage.R	2014-06-13 16:37:10 UTC (rev 188)
+++ pkg/GARPFRM/sandbox/test_discountFactorArbitrage.R	2014-06-13 23:32:18 UTC (rev 189)
@@ -4,7 +4,7 @@
 data(bonds)
 
 
-# The Cash Flows from Fixed-Rate Government Coupon Bonds
+## The Cash Flows from Fixed-Rate Government Coupon Bonds
 # Discount Factors and the Law of One Price
 # Initialize: The Cash Flows from Fixed-Rate: treasury bonds ticking in quarters
 cashFlow = rbind(c(100, 0, 0, 0), c(2 + 7/8, 102 + 7/8, 0, 0), c(3 + 3/4, 3 + 3/4, 103 + 3/4, 0), c(3 + 3/4, 3 + 3/4, 3 + 3/4, 103 + 3/4))
@@ -17,7 +17,7 @@
 (cashFlow%*%price)/100
 
 
-# Estimate bondPrice
+## Estimate bondPrice
 # Choose a 2 year bond with semiannual payments to match number of bond prices and CFs
 time = seq(from=0.5, to=2, by=0.5)
 # First define a bond object to be used throughout the analysis, where m is the compound frequency
@@ -29,6 +29,7 @@
 bondYTM(bond,DF)
 
 # Duration measures the effect of a small parallel shift in the yield curve
+# if rate goes up 10 basis points the relative P&L will change by mDuration*0.1%
 mDuration = bondDuration(bond,DF)
 # Duration plus convexity measure the effect of a larger parallel shift in the yield curve
 # Note however, they do not measure the effect of non-parallel shifts
@@ -76,7 +77,7 @@
 abline(h = theta, col="red", lty=2)
 
 
-# Appliation: Idiosyncratic Pricing of US Treasury Notes and Bonds
+## Appliation: Idiosyncratic Pricing of US Treasury Notes and Bonds
 t0 = as.Date("2013-08-15")
 t1 = as.Date("2014-02-15")
 tn = as.Date("2013-10-04")
@@ -89,7 +90,7 @@
 bondFullPrice(bond, y1, 8, t0, t1, tn)$accruedInterest
 
 
-# Estimating the term structure: compounded rates from discount factors
+## Estimating the term structure: compounded rates from discount factors
 # Ulitzing data in the following format: Cusip,	IssueDate,	MaturityDate,	Name,	Coupon,	Bid/Ask
 head(dat)
 ccRate = compoundingRate(dat, initialDate=as.Date("2000-05-15"), m=4, face=100)
@@ -97,4 +98,4 @@
 years = ccRate$years
 rate = ccRate$ccRate
 # Plot of continuously compounded spot rates
-plot(x=years, y=rate, type="l", ylab="Rate", xlab="Time to Maturity", main="Term Structure: Spot Rates")
+plot(x=years, y=rate, type="l", ylab="Rate", xlab="Time to Maturity", main="Term Structure: Spot Rates")
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