PrincipalComponentDynamics.java
package org.drip.sample.hjm;
import org.drip.analytics.date.*;
import org.drip.analytics.definition.MarketSurface;
import org.drip.dynamics.hjm.*;
import org.drip.function.definition.R1ToR1;
import org.drip.function.r1tor1.FlatUnivariate;
import org.drip.numerical.common.FormatUtil;
import org.drip.sequence.random.*;
import org.drip.service.env.EnvManager;
import org.drip.spline.basis.PolynomialFunctionSetParams;
import org.drip.spline.params.*;
import org.drip.spline.stretch.MultiSegmentSequenceBuilder;
import org.drip.state.creator.ScenarioMarketSurfaceBuilder;
import org.drip.state.identifier.*;
/*
* -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
*/
/*!
* Copyright (C) 2019 Lakshmi Krishnamurthy
* Copyright (C) 2018 Lakshmi Krishnamurthy
* Copyright (C) 2017 Lakshmi Krishnamurthy
* Copyright (C) 2016 Lakshmi Krishnamurthy
* Copyright (C) 2015 Lakshmi Krishnamurthy
*
* This file is part of DROP, an open-source library targeting risk, transaction costs, exposure, margin
* calculations, valuation adjustment, and portfolio construction within and across fixed income,
* credit, commodity, equity, FX, and structured products.
*
* https://lakshmidrip.github.io/DROP/
*
* DROP is composed of three modules:
*
* - DROP Analytics Core - https://lakshmidrip.github.io/DROP-Analytics-Core/
* - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
* - DROP Numerical Core - https://lakshmidrip.github.io/DROP-Numerical-Core/
*
* DROP Analytics Core implements libraries for the following:
* - Fixed Income Analytics
* - Asset Backed Analytics
* - XVA Analytics
* - Exposure and Margin Analytics
*
* DROP Portfolio Core implements libraries for the following:
* - Asset Allocation Analytics
* - Transaction Cost Analytics
*
* DROP Numerical Core implements libraries for the following:
* - Statistical Learning
* - Numerical Optimizer
* - Spline Builder
* - Algorithm Support
*
* Documentation for DROP is Spread Over:
*
* - Main => https://lakshmidrip.github.io/DROP/
* - Wiki => https://github.com/lakshmiDRIP/DROP/wiki
* - GitHub => https://github.com/lakshmiDRIP/DROP
* - Repo Layout Taxonomy => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
* - Javadoc => https://lakshmidrip.github.io/DROP/Javadoc/index.html
* - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
* - Release Versions => https://lakshmidrip.github.io/DROP/version.html
* - Community Credits => https://lakshmidrip.github.io/DROP/credits.html
* - Issues Catalog => https://github.com/lakshmiDRIP/DROP/issues
* - JUnit => https://lakshmidrip.github.io/DROP/junit/index.html
* - Jacoco => https://lakshmidrip.github.io/DROP/jacoco/index.html
*
* Licensed under the Apache License, Version 2.0 (the "License");
* you may not use this file except in compliance with the License.
*
* You may obtain a copy of the License at
* http://www.apache.org/licenses/LICENSE-2.0
*
* Unless required by applicable law or agreed to in writing, software
* distributed under the License is distributed on an "AS IS" BASIS,
* WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
*
* See the License for the specific language governing permissions and
* limitations under the License.
*/
/**
* <i>PrincipalComponentDynamics</i> demonstrates the Construction and Usage of the PCA-Based Multi-Factor
* Gaussian Model Dynamics for the Evolution of the Instantaneous Forward Rate, the Price, and the Short
* Rate.
*
* <br><br>
* <ul>
* <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/AnalyticsCore.md">Analytics Core Module</a></li>
* <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/FixedIncomeAnalyticsLibrary.md">Fixed Income Analytics Library</a></li>
* <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">Sample</a></li>
* <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>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class PrincipalComponentDynamics {
private static final MarketSurface FlatVolatilitySurface (
final JulianDate dtStart,
final String strCurrency,
final double dblFlatVol)
throws Exception
{
return ScenarioMarketSurfaceBuilder.CustomSplineWireSurface (
"VIEW_TARGET_VOLATILITY_SURFACE",
dtStart,
strCurrency,
new double[] {
dtStart.julian(),
dtStart.addYears (2).julian(),
dtStart.addYears (4).julian(),
dtStart.addYears (6).julian(),
dtStart.addYears (8).julian(),
dtStart.addYears (10).julian()
},
new double[] {
dtStart.julian(),
dtStart.addYears (2).julian(),
dtStart.addYears (4).julian(),
dtStart.addYears (6).julian(),
dtStart.addYears (8).julian(),
dtStart.addYears (10).julian()
},
new double[][] {
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
{dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol, dblFlatVol},
},
new SegmentCustomBuilderControl (
MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
new PolynomialFunctionSetParams (4),
SegmentInelasticDesignControl.Create (
2,
2
),
null,
null
),
new SegmentCustomBuilderControl (
MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
new PolynomialFunctionSetParams (4),
SegmentInelasticDesignControl.Create (
2,
2
),
null,
null
)
);
}
private static final MultiFactorStateEvolver HJMInstance (
final JulianDate dtStart,
final String strCurrency,
final MarketSurface mktSurfFlatVol1,
final MarketSurface mktSurfFlatVol2,
final MarketSurface mktSurfFlatVol3,
final R1ToR1 auForwardRate,
final int iNumFactor)
throws Exception
{
MultiFactorVolatility mfv = new MultiFactorVolatility (
new MarketSurface[] {
mktSurfFlatVol1,
mktSurfFlatVol2,
mktSurfFlatVol3
},
new PrincipalFactorSequenceGenerator (
new UnivariateSequenceGenerator[] {
new BoxMullerGaussian (
0.,
1.
),
new BoxMullerGaussian (
0.,
1.
),
new BoxMullerGaussian (
0.,
1.
)
},
new double[][] {
{1.0, 0.1, 0.2},
{0.1, 1.0, 0.2},
{0.2, 0.1, 1.0}
},
iNumFactor
)
);
return new MultiFactorStateEvolver (
FundingLabel.Standard (strCurrency),
ForwardLabel.Create (
strCurrency,
"6M"
),
mfv,
auForwardRate
);
}
private static final void Evolve (
final MultiFactorStateEvolver hjm,
final JulianDate dtStart,
final String strCurrency,
final String strViewTenor,
final String strTargetTenor,
final double dblStartingForwardRate,
final double dblStartingPrice)
throws Exception
{
int iViewDate = dtStart.addTenor (strViewTenor).julian();
int iTargetDate = dtStart.addTenor (strTargetTenor).julian();
int iDayStep = 2;
JulianDate dtSpot = dtStart;
double dblPrice = dblStartingPrice;
double dblShortRate = dblStartingForwardRate;
double dblLIBORForwardRate = dblStartingForwardRate;
double dblInstantaneousForwardRate = dblStartingForwardRate;
double dblContinuouslyCompoundedShortRate = dblStartingForwardRate;
double dblShiftedLIBORForwardRate = dblStartingForwardRate + (365.25 / (iTargetDate - iViewDate));
System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");
System.out.println ("\t| ||");
System.out.println ("\t| Multi-Factor PCA-Based Gaussian HJM Run ||");
System.out.println ("\t| --------------------------------------- ||");
System.out.println ("\t| ||");
System.out.println ("\t| Number of Prinicipal Components: " + hjm.mfv().msg().numFactor() + " ||");
System.out.println ("\t| ||");
System.out.println ("\t| L->R: ||");
System.out.println ("\t| Date ||");
System.out.println ("\t| Instantaneous Forward Rate (%) ||");
System.out.println ("\t| Instantaneous Forward Rate - Change (%) ||");
System.out.println ("\t| LIBOR Forward Rate (%) ||");
System.out.println ("\t| LIBOR Forward Rate - Change (%) ||");
System.out.println ("\t| Shifted LIBOR Forward Rate (%) ||");
System.out.println ("\t| Shifted LIBOR Forward Rate - Change (%) ||");
System.out.println ("\t| Short Rate (%) ||");
System.out.println ("\t| Short Rate - Change (%) ||");
System.out.println ("\t| Continuously Compounded Short Rate (%) ||");
System.out.println ("\t| Continuously Compounded Short Rate - Change (%) ||");
System.out.println ("\t| Price ||");
System.out.println ("\t| Price - Change ||");
System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");
while (dtSpot.julian() < iViewDate) {
int iSpotDate = dtSpot.julian();
double dblIFRIncrement = hjm.instantaneousForwardRateIncrement (
iViewDate,
iTargetDate,
iDayStep
);
dblInstantaneousForwardRate += dblIFRIncrement;
double dblLIBORForwardRateIncrement = hjm.liborForwardRateIncrement (
iSpotDate,
iViewDate,
iTargetDate,
dblLIBORForwardRate,
iDayStep
);
dblLIBORForwardRate += dblLIBORForwardRateIncrement;
double dblShiftedLIBORForwardRateIncrement = hjm.shiftedLIBORForwardIncrement (
iSpotDate,
iViewDate,
iTargetDate,
dblShiftedLIBORForwardRate,
iDayStep
);
dblShiftedLIBORForwardRate += dblShiftedLIBORForwardRateIncrement;
double dblShortRateIncrement = hjm.shortRateIncrement (
iSpotDate,
iViewDate,
iDayStep
);
dblShortRate += dblShortRateIncrement;
double dblProportionalPriceIncrement = hjm.proportionalPriceIncrement (
iSpotDate,
iViewDate,
dblShortRate,
iDayStep
);
dblPrice *= (1. + dblProportionalPriceIncrement);
double dblContinuouslyCompoundedShortRateIncrement = hjm.compoundedShortRateIncrement (
iSpotDate,
iViewDate,
iTargetDate,
dblContinuouslyCompoundedShortRate,
dblShortRate,
iDayStep
);
dblContinuouslyCompoundedShortRate += dblContinuouslyCompoundedShortRateIncrement;
System.out.println ("\t| [" + dtSpot + "] = " +
FormatUtil.FormatDouble (dblInstantaneousForwardRate, 1, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblIFRIncrement, 1, 2, 100.) + "% || " +
FormatUtil.FormatDouble (dblLIBORForwardRate, 1, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblLIBORForwardRateIncrement, 1, 2, 100.) + "% || " +
FormatUtil.FormatDouble (dblShiftedLIBORForwardRate, 1, 4, 1.) + " | " +
FormatUtil.FormatDouble (dblShiftedLIBORForwardRateIncrement, 1, 2, 100.) + "% || " +
FormatUtil.FormatDouble (dblShortRate, 1, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblShortRateIncrement, 1, 2, 100.) + "% || " +
FormatUtil.FormatDouble (dblContinuouslyCompoundedShortRate, 1, 2, 100.) + "% | " +
FormatUtil.FormatDouble (dblContinuouslyCompoundedShortRateIncrement, 1, 2, 100.) + "% || " +
FormatUtil.FormatDouble (dblPrice, 2, 2, 100.) + " | " +
FormatUtil.FormatDouble (dblProportionalPriceIncrement, 1, 2, 100.) + " || "
);
dtSpot = dtSpot.addBusDays (iDayStep, strCurrency);
}
System.out.println ("\t|-------------------------------------------------------------------------------------------------------------------------------||");
}
public static final void main (
final String[] astrArgs)
throws Exception
{
EnvManager.InitEnv ("");
String strCurrency = "USD";
JulianDate dtSpot = DateUtil.Today();
double dblFlatVol1 = 0.01;
double dblFlatVol2 = 0.02;
double dblFlatVol3 = 0.03;
double dblFlatForwardRate = 0.05;
double dblStartingPrice = 0.9875;
MarketSurface mktSurfFlatVol1 = FlatVolatilitySurface (
dtSpot,
strCurrency,
dblFlatVol1
);
MarketSurface mktSurfFlatVol2 = FlatVolatilitySurface (
dtSpot,
strCurrency,
dblFlatVol2
);
MarketSurface mktSurfFlatVol3 = FlatVolatilitySurface (
dtSpot,
strCurrency,
dblFlatVol3
);
int[] aiNumFactor = new int[] {
1, 2, 3
};
for (int iNumFactor : aiNumFactor) {
MultiFactorStateEvolver hjm = HJMInstance (
dtSpot,
strCurrency,
mktSurfFlatVol1,
mktSurfFlatVol2,
mktSurfFlatVol3,
new FlatUnivariate (dblFlatForwardRate),
iNumFactor
);
Evolve (
hjm,
dtSpot,
strCurrency,
"3M",
"6M",
dblFlatForwardRate,
dblStartingPrice
);
}
EnvManager.TerminateEnv();
}
}