Introduction

Abstract

This chapter summarizes the motivation for managing the risks related to interest rates changes and the interest rate risk management techniques actually used by most institutions and private investors: duration vector (DV) models, principal component analysis (PCA) and key rate duration (KRD). We highlight how a number of studies conducting empirical tests of these models reported puzzling results: models capable to better capture the dynamics of the yield curve were not always shown to lead to better hedging. In this chapter, we summarize the contribution of each of the following chapters in explaining these results and proposing alternative models capable of adding value over the abovementioned traditional models both for hedging and portfolio management.