Abstract

In this paper we set out a framework that will help Vietnamese companies to enhance their interest rate risk management practices. We start by analysing time series of Vietnamese Treasury bill rates. Using the maximum likelihood method we calibrate to these data seven models of interest rate dynamics: Vasicek (1977), Cox, Ingersoll and Ross (1985), Chan, Karolyi, Longstaff and Sanders (1992), Ahn and Gao (1999), Ait-Sahalia (1996), two factor version of Cox, Ingersoll and Ross (1985), and AR(1)-GARCH(1,1). Then using calibrated model parameters we calculate risk measures such as Value at Risk or Expected Shortfall and project the interest rates over three months. Finally we study the resulting risk measures as well as distributions of interest rates generated by each model and provide guidance regarding suitability of these models for risk management purposes.

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