MultiFactorQMDynamics.java

  1. package org.drip.sample.hjm;

  3. import org.drip.analytics.date.*;
  4. import org.drip.analytics.definition.MarketSurface;
  5. import org.drip.analytics.support.Helper;
  6. import org.drip.dynamics.hjm.*;
  7. import org.drip.function.definition.R1ToR1;
  8. import org.drip.function.r1tor1.FlatUnivariate;
  9. import org.drip.numerical.common.FormatUtil;
  10. import org.drip.sequence.random.*;
  11. import org.drip.service.env.EnvManager;
  12. import org.drip.spline.basis.PolynomialFunctionSetParams;
  13. import org.drip.spline.params.*;
  14. import org.drip.spline.stretch.MultiSegmentSequenceBuilder;
  15. import org.drip.state.creator.ScenarioMarketSurfaceBuilder;
  16. import org.drip.state.identifier.*;

  18. /*
  19.  * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
  20.  */

  22. /*!
  23.  * Copyright (C) 2019 Lakshmi Krishnamurthy
  24.  * Copyright (C) 2018 Lakshmi Krishnamurthy
  25.  * Copyright (C) 2017 Lakshmi Krishnamurthy
  26.  * Copyright (C) 2016 Lakshmi Krishnamurthy
  27.  * Copyright (C) 2015 Lakshmi Krishnamurthy
  28.  * 
  29.  *  This file is part of DROP, an open-source library targeting risk, transaction costs, exposure, margin
  30.  *      calculations, valuation adjustment, and portfolio construction within and across fixed income,
  31.  *      credit, commodity, equity, FX, and structured products.
  32.  *  
  33.  *      https://lakshmidrip.github.io/DROP/
  34.  *  
  35.  *  DROP is composed of three modules:
  36.  *  
  37.  *  - DROP Analytics Core - https://lakshmidrip.github.io/DROP-Analytics-Core/
  38.  *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
  39.  *  - DROP Numerical Core - https://lakshmidrip.github.io/DROP-Numerical-Core/
  40.  * 
  41.  *  DROP Analytics Core implements libraries for the following:
  42.  *  - Fixed Income Analytics
  43.  *  - Asset Backed Analytics
  44.  *  - XVA Analytics
  45.  *  - Exposure and Margin Analytics
  46.  * 
  47.  *  DROP Portfolio Core implements libraries for the following:
  48.  *  - Asset Allocation Analytics
  49.  *  - Transaction Cost Analytics
  50.  * 
  51.  *  DROP Numerical Core implements libraries for the following:
  52.  *  - Statistical Learning
  53.  *  - Numerical Optimizer
  54.  *  - Spline Builder
  55.  *  - Algorithm Support
  56.  * 
  57.  *  Documentation for DROP is Spread Over:
  58.  * 
  59.  *  - Main                     => https://lakshmidrip.github.io/DROP/
  60.  *  - Wiki                     => https://github.com/lakshmiDRIP/DROP/wiki
  61.  *  - GitHub                   => https://github.com/lakshmiDRIP/DROP
  62.  *  - Repo Layout Taxonomy     => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
  63.  *  - Javadoc                  => https://lakshmidrip.github.io/DROP/Javadoc/index.html
  64.  *  - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
  65.  *  - Release Versions         => https://lakshmidrip.github.io/DROP/version.html
  66.  *  - Community Credits        => https://lakshmidrip.github.io/DROP/credits.html
  67.  *  - Issues Catalog           => https://github.com/lakshmiDRIP/DROP/issues
  68.  *  - JUnit                    => https://lakshmidrip.github.io/DROP/junit/index.html
  69.  *  - Jacoco                   => https://lakshmidrip.github.io/DROP/jacoco/index.html
  70.  * 
  71.  *  Licensed under the Apache License, Version 2.0 (the "License");
  72.  *      you may not use this file except in compliance with the License.
  73.  *   
  74.  *  You may obtain a copy of the License at
  75.  *      http://www.apache.org/licenses/LICENSE-2.0
  76.  *  
  77.  *  Unless required by applicable law or agreed to in writing, software
  78.  *      distributed under the License is distributed on an "AS IS" BASIS,
  79.  *      WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
  80.  *  
  81.  *  See the License for the specific language governing permissions and
  82.  *      limitations under the License.
  83.  */

  85. /**
  86.  * <i>MultiFactorQMDynamics</i> demonstrates the Construction and Usage of the 3-Factor Gaussian Model
  87.  * Dynamics for the Evolution of the Discount Factor Quantification Metrics - the Instantaneous Forward Rate,
  88.  * the LIBOR Forward Rate, the Shifted LIBOR Forward Rate, the Short Rate, the Compounded Short Rate, and the
  89.  * Price.
  90.  *  
  91.  * <br><br>
  92.  *  <ul>
  93.  *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/AnalyticsCore.md">Analytics Core Module</a></li>
  94.  *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/FixedIncomeAnalyticsLibrary.md">Fixed Income Analytics Library</a></li>
  95.  *      <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">Sample</a></li>
  96.  *      <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/hjm/README.md">Generic HJM Evolution</a></li>
  97.  *  </ul>
  98.  * <br><br>
  99.  *
  100.  * @author Lakshmi Krishnamurthy
  101.  */

  103. public class MultiFactorQMDynamics {

  105.     private static final MarketSurface FlatVolatilitySurface (
  106.         final JulianDate dtStart,
  107.         final String strCurrency,
  108.         final double dblFlatVol)
  109.         throws Exception
  110.     {
  111.         return ScenarioMarketSurfaceBuilder.CustomSplineWireSurface (
  112.             "VIEW_TARGET_VOLATILITY_SURFACE",
  113.             dtStart,
  114.             strCurrency,
  115.             new double[] {
  116.                 dtStart.julian(),
  117.                 dtStart.addYears (2).julian(),
  118.                 dtStart.addYears (4).julian(),
  119.                 dtStart.addYears (6).julian(),
  120.                 dtStart.addYears (8).julian(),
  121.                 dtStart.addYears (10).julian()
  122.             },
  123.             new double[] {
  124.                 dtStart.julian(),
  125.                 dtStart.addYears (2).julian(),
  126.                 dtStart.addYears (4).julian(),
  127.                 dtStart.addYears (6).julian(),
  128.                 dtStart.addYears (8).julian(),
  129.                 dtStart.addYears (10).julian()
  130.             },
  131.             new double[][] {
  132.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  133.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  134.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  135.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  136.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  137.                 {dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
  138.             },
  139.             new SegmentCustomBuilderControl (
  140.                 MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
  141.                 new PolynomialFunctionSetParams (4),
  142.                 SegmentInelasticDesignControl.Create (
  143.                     2,
  144.                     2
  145.                 ),
  146.                 null,
  147.                 null
  148.             ),
  149.             new SegmentCustomBuilderControl (
  150.                 MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
  151.                 new PolynomialFunctionSetParams (4),
  152.                 SegmentInelasticDesignControl.Create (
  153.                     2,
  154.                     2
  155.                 ),
  156.                 null,
  157.                 null
  158.             )
  159.         );
  160.     }

  162.     private static final MultiFactorStateEvolver HJMInstance (
  163.         final JulianDate dtStart,
  164.         final String strCurrency,
  165.         final String strTenor,
  166.         final MarketSurface mktSurfFlatVol1,
  167.         final MarketSurface mktSurfFlatVol2,
  168.         final MarketSurface mktSurfFlatVol3,
  169.         final R1ToR1 auForwardRate)
  170.         throws Exception
  171.     {
  172.         MultiFactorVolatility mfv = new MultiFactorVolatility (
  173.             new MarketSurface[] {
  174.                 mktSurfFlatVol1,
  175.                 mktSurfFlatVol2,
  176.                 mktSurfFlatVol3
  177.             },
  178.             new PrincipalFactorSequenceGenerator (
  179.                 new UnivariateSequenceGenerator[] {
  180.                     new BoxMullerGaussian (
  181.                         0.,
  182.                         1.
  183.                     ),
  184.                     new BoxMullerGaussian (
  185.                         0.,
  186.                         1.
  187.                     ),
  188.                     new BoxMullerGaussian (
  189.                         0.,
  190.                         1.
  191.                     )
  192.                 },
  193.                 new double[][] {
  194.                     {1.0, 0.1, 0.2},
  195.                     {0.1, 1.0, 0.2},
  196.                     {0.2, 0.1, 1.0}
  197.                 },
  198.                 3
  199.             )
  200.         );

  202.         return new MultiFactorStateEvolver (
  203.             FundingLabel.Standard (strCurrency),
  204.             ForwardLabel.Create (
  205.                 strCurrency,
  206.                 strTenor
  207.             ),
  208.             mfv,
  209.             auForwardRate
  210.         );
  211.     }

  213.     private static final ShortForwardRateUpdate InitQMSnap (
  214.         final JulianDate dtStart,
  215.         final String strCurrency,
  216.         final String strViewTenor,
  217.         final String strTenor,
  218.         final double dblInitialForwardRate,
  219.         final double dblInitialPrice)
  220.         throws Exception
  221.     {
  222.         return ShortForwardRateUpdate.Create (
  223.             FundingLabel.Standard (strCurrency),
  224.             ForwardLabel.Create (
  225.                 strCurrency,
  226.                 strTenor
  227.             ),
  228.             dtStart.julian(),
  229.             dtStart.julian(),
  230.             dtStart.addTenor (strViewTenor).julian(),
  231.             dblInitialForwardRate,
  232.             0.,
  233.             dblInitialForwardRate,
  234.             0.,
  235.             dblInitialForwardRate + (365.25 / Helper.TenorToDays (strTenor)),
  236.             0.,
  237.             dblInitialForwardRate,
  238.             0.,
  239.             dblInitialForwardRate,
  240.             0.,
  241.             dblInitialPrice,
  242.             0.
  243.         );
  244.     }

  246.     private static final void QMEvolution (
  247.         final MultiFactorStateEvolver hjm,
  248.         final JulianDate dtStart,
  249.         final String strCurrency,
  250.         final String strViewTenor,
  251.         final ShortForwardRateUpdate qmInitial)
  252.         throws Exception
  253.     {
  254.         int iViewDate = dtStart.addTenor (strViewTenor).julian();

  256.         int iDayStep = 2;
  257.         ShortForwardRateUpdate qm = qmInitial;
  258.         JulianDate dtSpot = dtStart;

  260.         System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");

  262.         System.out.println ("\t|                                                                                                                               ||");

  264.         System.out.println ("\t|    3-Factor Gaussian HJM Quantification Metric Run                                                                            ||");

  266.         System.out.println ("\t|    -----------------------------------------------                                                                            ||");

  268.         System.out.println ("\t|                                                                                                                               ||");

  270.         System.out.println ("\t|        L->R:                                                                                                                  ||");

  272.         System.out.println ("\t|            Date                                                                                                               ||");

  274.         System.out.println ("\t|            Instantaneous Forward Rate (%)                                                                                     ||");

  276.         System.out.println ("\t|            Instantaneous Forward Rate - Change (%)                                                                            ||");

  278.         System.out.println ("\t|            LIBOR Forward Rate (%)                                                                                             ||");

  280.         System.out.println ("\t|            LIBOR Forward Rate - Change (%)                                                                                    ||");

  282.         System.out.println ("\t|            Shifted LIBOR Forward Rate (%)                                                                                     ||");

  284.         System.out.println ("\t|            Shifted LIBOR Forward Rate - Change (%)                                                                            ||");

  286.         System.out.println ("\t|            Short Rate (%)                                                                                                     ||");

  288.         System.out.println ("\t|            Short Rate - Change (%)                                                                                            ||");

  290.         System.out.println ("\t|            Continuously Compounded Short Rate (%)                                                                             ||");

  292.         System.out.println ("\t|            Continuously Compounded Short Rate - Change (%)                                                                    ||");

  294.         System.out.println ("\t|            Price                                                                                                              ||");

  296.         System.out.println ("\t|            Price - Change                                                                                                     ||");

  298.         System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");

  300.         while (dtSpot.julian() < iViewDate) {
  301.             int iSpotDate = dtSpot.julian();

  303.             qm = (ShortForwardRateUpdate) hjm.evolve (
  304.                 iSpotDate,
  305.                 iViewDate,
  306.                 iDayStep,
  307.                 qm
  308.             );

  310.             System.out.println ("\t| [" + dtSpot + "] = " +
  311.                 FormatUtil.FormatDouble (qm.instantaneousForwardRate(), 1, 2, 100.) + "% | " +
  312.                 FormatUtil.FormatDouble (qm.instantaneousForwardRateIncrement(), 1, 2, 100.) + "% || " +
  313.                 FormatUtil.FormatDouble (qm.liborForwardRate(), 1, 2, 100.) + "% | " +
  314.                 FormatUtil.FormatDouble (qm.liborForwardRateIncrement(), 1, 2, 100.) + "% || " +
  315.                 FormatUtil.FormatDouble (qm.shiftedLIBORForwardRate(), 1, 4, 1.) + " | " +
  316.                 FormatUtil.FormatDouble (qm.shiftedLIBORForwardRateIncrement(), 1, 2, 100.) + "% || " +
  317.                 FormatUtil.FormatDouble (qm.shortRate(), 1, 2, 100.) + "% | " +
  318.                 FormatUtil.FormatDouble (qm.shortRateIncrement(), 1, 2, 100.) + "% || " +
  319.                 FormatUtil.FormatDouble (qm.compoundedShortRate(), 1, 2, 100.) + "% | " +
  320.                 FormatUtil.FormatDouble (qm.compoundedShortRateIncrement(), 1, 2, 100.) + "% || " +
  321.                 FormatUtil.FormatDouble (qm.price(), 2, 2, 100.) + " | " +
  322.                 FormatUtil.FormatDouble (qm.priceIncrement(), 1, 2, 100.) + " || "
  323.             );

  325.             dtSpot = dtSpot.addBusDays (
  326.                 iDayStep,
  327.                 strCurrency
  328.             );
  329.         }

  331.         System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");
  332.     }

  334.     public static final void main (
  335.         final String[] astrArgs)
  336.         throws Exception
  337.     {
  338.         EnvManager.InitEnv ("");

  340.         String strCurrency = "USD";
  341.         double dblFlatVol1 = 0.007;
  342.         double dblFlatVol2 = 0.009;
  343.         double dblFlatVol3 = 0.004;
  344.         double dblFlatForwardRate = 0.05;
  345.         double dblInitialPrice = 0.9875;
  346.         String strViewTenor = "3M";
  347.         String strTenor = "6M";

  349.         JulianDate dtSpot = DateUtil.Today();

  351.         MarketSurface mktSurfFlatVol1 = FlatVolatilitySurface (
  352.             dtSpot,
  353.             strCurrency,
  354.             dblFlatVol1
  355.         );

  357.         MarketSurface mktSurfFlatVol2 = FlatVolatilitySurface (
  358.             dtSpot,
  359.             strCurrency,
  360.             dblFlatVol2
  361.         );

  363.         MarketSurface mktSurfFlatVol3 = FlatVolatilitySurface (
  364.             dtSpot,
  365.             strCurrency,
  366.             dblFlatVol3
  367.         );

  369.         MultiFactorStateEvolver hjm = HJMInstance (
  370.             dtSpot,
  371.             strCurrency,
  372.             strTenor,
  373.             mktSurfFlatVol1,
  374.             mktSurfFlatVol2,
  375.             mktSurfFlatVol3,
  376.             new FlatUnivariate (dblFlatForwardRate)
  377.         );

  379.         ShortForwardRateUpdate qmInitial = InitQMSnap (
  380.             dtSpot,
  381.             strCurrency,
  382.             strViewTenor,
  383.             strTenor,
  384.             dblFlatForwardRate,
  385.             dblInitialPrice
  386.         );

  388.         QMEvolution (
  389.             hjm,
  390.             dtSpot,
  391.             strCurrency,
  392.             strViewTenor,
  393.             qmInitial
  394.         );

  396.         EnvManager.TerminateEnv();
  397.     }
  398. }
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