Method And System For Simulating Risk Factors In Parametric Models Using Risk Neutral Historical Bootstrapping

Abstract

An improved method for simulating noise-varying risk factor values in a parametric simulation comprises analyzing historical data to determine the actual value of the risk factors and other attributes in the model and using this data to generate historical residual values which reproduces the historical price when used in the model with corresponding historical attribute values. The set of historical residual values is standardized and can be bootstrapped to increase the number of members in the set or vary the sets properties. Values of the historical residuals are then selected, e.g., at random, and used in place of the random noise components to produce simulated risk factor values which are used in the parametric model to simulate the evolution of the instrument price.

1 . A method for simulating the value of an attribute of a financial instrument comprising the steps of:
 providing a parametric model for the attribute having at least one noise-varying parameter an with a corresponding noise component ε n ;   determining values for the at least one parameter and the attribute at various time indices i using historical data;   deriving a set of historical residual values ε n,i  for each noise component ε n , the historical residual value ε n,i  at index i, when applied to the model with the determined parameter values at index i, at substantially reproducing the determined attribute value at index i;   standardizing each set of historical residual values ε n ; and   using values selected from the set of standardized historical residual values ε n  as the noise component during a simulation of the attribute value via the model.   
     
     
         2 .- 20 . (canceled)