MultiStretchCurveBuilder.java

package org.drip.sample.overnight;

import org.drip.analytics.date.*;
import org.drip.function.r1tor1.QuadraticRationalShapeControl;
import org.drip.market.otc.*;
import org.drip.numerical.common.FormatUtil;
import org.drip.param.creator.*;
import org.drip.param.valuation.*;
import org.drip.product.creator.*;
import org.drip.product.definition.CalibratableComponent;
import org.drip.product.rates.*;
import org.drip.service.env.EnvManager;
import org.drip.spline.basis.PolynomialFunctionSetParams;
import org.drip.spline.params.*;
import org.drip.spline.stretch.*;
import org.drip.state.creator.ScenarioDiscountCurveBuilder;
import org.drip.state.discount.*;
import org.drip.state.estimator.LatentStateStretchBuilder;
import org.drip.state.identifier.*;
import org.drip.state.inference.*;

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

/*!
 * Copyright (C) 2018 Lakshmi Krishnamurthy
 * Copyright (C) 2017 Lakshmi Krishnamurthy
 * Copyright (C) 2016 Lakshmi Krishnamurthy
 * Copyright (C) 2015 Lakshmi Krishnamurthy
 * Copyright (C) 2014 Lakshmi Krishnamurthy
 * 
 *  This file is part of DRIP, a free-software/open-source library for buy/side financial/trading model
 *      libraries targeting analysts and developers
 *      https://lakshmidrip.github.io/DRIP/
 *  
 *  DRIP is composed of four main libraries:
 *  
 *  - DRIP Fixed Income - https://lakshmidrip.github.io/DRIP-Fixed-Income/
 *  - DRIP Asset Allocation - https://lakshmidrip.github.io/DRIP-Asset-Allocation/
 *  - DRIP Numerical Optimizer - https://lakshmidrip.github.io/DRIP-Numerical-Optimizer/
 *  - DRIP Statistical Learning - https://lakshmidrip.github.io/DRIP-Statistical-Learning/
 * 
 *  - DRIP Fixed Income: Library for Instrument/Trading Conventions, Treasury Futures/Options,
 *      Funding/Forward/Overnight Curves, Multi-Curve Construction/Valuation, Collateral Valuation and XVA
 *      Metric Generation, Calibration and Hedge Attributions, Statistical Curve Construction, Bond RV
 *      Metrics, Stochastic Evolution and Option Pricing, Interest Rate Dynamics and Option Pricing, LMM
 *      Extensions/Calibrations/Greeks, Algorithmic Differentiation, and Asset Backed Models and Analytics.
 * 
 *  - DRIP Asset Allocation: Library for model libraries for MPT framework, Black Litterman Strategy
 *      Incorporator, Holdings Constraint, and Transaction Costs.
 * 
 *  - DRIP Numerical Optimizer: Library for Numerical Optimization and Spline Functionality.
 * 
 *  - DRIP Statistical Learning: Library for Statistical Evaluation and Machine Learning.
 * 
 *  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.
 */

/**
 * MultiStretchCurveBuilder contains a sample of the construction and usage of the Overnight Curve built
 *  using the Overnight Indexed Swap Product Instruments in their distinct stretches. The Tenors/Quotes to
 *  replicate are taken from:
 * 
 *  - Ametrano, F., and M. Bianchetti (2013): Everything You Always Wanted to Know About Multiple Interest
 *      Rate Curve Bootstrapping but Were Afraid to Ask,
 *          http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2219548
 * 
 * @author Lakshmi Krishnamurthy
 */

public class MultiStretchCurveBuilder {

    private static final FixFloatComponent OTCOISFixFloat (
        final JulianDate dtSpot,
        final String strCurrency,
        final String strMaturityTenor,
        final double dblCoupon)
    {
        FixedFloatSwapConvention ffConv = OvernightFixedFloatContainer.FundConventionFromJurisdiction (
            strCurrency
        );

        return ffConv.createFixFloatComponent (
            dtSpot,
            strMaturityTenor,
            dblCoupon,
            0.,
            1.
        );
    }

    /*
     * Construct the Array of Deposit Instruments from the given set of parameters
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final SingleStreamComponent[] DepositInstrumentsFromMaturityDays (
        final JulianDate dtEffective,
        final String strCurrency,
        final int[] aiDay)
        throws Exception
    {
        SingleStreamComponent[] aDeposit = new SingleStreamComponent[aiDay.length];

        for (int i = 0; i < aiDay.length; ++i)
            aDeposit[i] = SingleStreamComponentBuilder.Deposit (
                dtEffective,
                dtEffective.addBusDays (
                    aiDay[i],
                    strCurrency
                ),
                OvernightLabel.Create (
                    strCurrency
                )
            );

        return aDeposit;
    }

    /*
     * Construct the Array of Overnight Index Instruments from the given set of parameters
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final FixFloatComponent[] OISFromMaturityTenor (
        final JulianDate dtSpot,
        final String strCurrency,
        final String[] astrMaturityTenor,
        final double[] adblCoupon)
        throws Exception
    {
        FixFloatComponent[] aOIS = new FixFloatComponent[astrMaturityTenor.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            aOIS[i] = OTCOISFixFloat (
                dtSpot,
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

        return aOIS;
    }

    private static final FixFloatComponent[] OISFuturesFromMaturityTenor (
        final JulianDate dtSpot,
        final String strCurrency,
        final String[] astrStartTenor,
        final String[] astrMaturityTenor,
        final double[] adblCoupon)
        throws Exception
    {
        FixFloatComponent[] aOISFutures = new FixFloatComponent[astrMaturityTenor.length];

        for (int i = 0; i < astrMaturityTenor.length; ++i)
            aOISFutures[i] = OTCOISFixFloat (
                dtSpot.addTenor (astrStartTenor[i]),
                strCurrency,
                astrMaturityTenor[i],
                adblCoupon[i]
            );

        return aOISFutures;
    }

    /*
     * Construct the Array of Overnight Index Future Instruments from the given set of parameters
     * 
     *      USE WITH CARE: This sample ignores errors and does not handle exceptions.
     */

    private static final void CustomOISCurveBuilderSample (
        final JulianDate dtSpot,
        final String strCurrency,
        final String strHeaderComment)
        throws Exception
    {
        System.out.println ("\n\t----------------------------------------------------------------");

        System.out.println ("\t     " + strHeaderComment);

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

        /*
         * Construct the Array of Deposit Instruments and their Quotes from the given set of parameters
         */

        SingleStreamComponent[] aDepositComp = DepositInstrumentsFromMaturityDays (
            dtSpot,
            strCurrency,
            new int[] {
                1, 2, 3
            }
        );

        double[] adblDepositQuote = new double[] {
            0.0004,     // 1D
            0.0004,     // 2D
            0.0004      // 3D
        };

        String[] astrDepositMeasure = new String[] {
            "ForwardRate",      // 1D
            "ForwardRate",      // 2D
            "ForwardRate"       // 3D
        };

        /*
         * Construct the Deposit Instrument Set Stretch Builder
         */

        LatentStateStretchSpec depositStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "DEPOSIT",
            aDepositComp,
            astrDepositMeasure,
            adblDepositQuote
        );

        /*
         * Construct the Array of Short End OIS Instruments and their Quotes from the given set of parameters
         */

        double[] adblShortEndOISQuote = new double[] {
            0.00070,    //   1W
            0.00069,    //   2W
            0.00078,    //   3W
            0.00074     //   1M
        };

        CalibratableComponent[] aShortEndOISComp = OISFromMaturityTenor (
            dtSpot,
            strCurrency,
            new String[] {
                "1W",
                "2W",
                "3W",
                "1M"
            },
            adblShortEndOISQuote
        );

        String[] astrShortEndOISMeasure = new String[] {
            "SwapRate",    //   1W
            "SwapRate",    //   2W
            "SwapRate",    //   3W
            "SwapRate"     //   1M
        };

        /*
         * Construct the Short End OIS Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisShortEndStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "OIS_SHORT_END",
            aShortEndOISComp,
            astrShortEndOISMeasure,
            adblShortEndOISQuote
        );

        /*
         * Construct the Array of OIS Futures Instruments and their Quotes from the given set of parameters
         */

        double[] adblOISFutureQuote = new double[] {
             0.00046,    //   1M x 1M
             0.00016,    //   2M x 1M
            -0.00007,    //   3M x 1M
            -0.00013,    //   4M x 1M
            -0.00014     //   5M x 1M
        };

        CalibratableComponent[] aOISFutureComp = OISFuturesFromMaturityTenor (
            dtSpot,
            strCurrency,
            new String[] {
                "1M", "2M", "3M", "4M", "5M"
            },
            new String[] {
                "1M", "1M", "1M", "1M", "1M"
            },
            adblOISFutureQuote
        );

        String[] astrOISFutureMeasure = new String[] {
            "SwapRate",    //   1M
            "SwapRate",    //   2M
            "SwapRate",    //   3M
            "SwapRate",    //   4M
            "SwapRate"     //   5M
        };

        /*
         * Construct the OIS Future Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisFutureStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "OIS_FUTURE",
            aOISFutureComp,
            astrOISFutureMeasure,
            adblOISFutureQuote
        );

        /*
         * Construct the Array of Long End OIS Instruments and their Quotes from the given set of parameters
         */

        double[] adblLongEndOISQuote = new double[] {
            0.00002,    //  15M
            0.00008,    //  18M
            0.00021,    //  21M
            0.00036,    //   2Y
            0.00127,    //   3Y
            0.00274,    //   4Y
            0.00456,    //   5Y
            0.00647,    //   6Y
            0.00827,    //   7Y
            0.00996,    //   8Y
            0.01147,    //   9Y
            0.01280,    //  10Y
            0.01404,    //  11Y
            0.01516,    //  12Y
            0.01764,    //  15Y
            0.01939,    //  20Y
            0.02003,    //  25Y
            0.02038     //  30Y
        };

        String[] adblLongEndOISMeasure = new String[] {
            "SwapRate",    //  15M
            "SwapRate",    //  18M
            "SwapRate",    //  21M
            "SwapRate",    //   2Y
            "SwapRate",    //   3Y
            "SwapRate",    //   4Y
            "SwapRate",    //   5Y
            "SwapRate",    //   6Y
            "SwapRate",    //   7Y
            "SwapRate",    //   8Y
            "SwapRate",    //   9Y
            "SwapRate",    //  10Y
            "SwapRate",    //  11Y
            "SwapRate",    //  12Y
            "SwapRate",    //  15Y
            "SwapRate",    //  20Y
            "SwapRate",    //  25Y
            "SwapRate"     //  30Y
        };

        CalibratableComponent[] aLongEndOISComp = OISFromMaturityTenor (
            dtSpot,
            strCurrency,
            new String[] {
                "15M",
                "18M",
                "21M",
                "2Y",
                "3Y",
                "4Y",
                "5Y",
                "6Y",
                "7Y",
                "8Y",
                "9Y",
                "10Y",
                "11Y",
                "12Y",
                "15Y",
                "20Y",
                "25Y",
                "30Y"
            },
            adblLongEndOISQuote
        );

        /*
         * Construct the Long End OIS Instrument Set Stretch Builder
         */

        LatentStateStretchSpec oisLongEndStretch = LatentStateStretchBuilder.ForwardFundingStretchSpec (
            "OIS_LONG_END",
            aLongEndOISComp,
            adblLongEndOISMeasure,
            adblLongEndOISQuote
        );

        LatentStateStretchSpec[] aStretchSpec = new LatentStateStretchSpec[] {
            depositStretch,
            oisShortEndStretch,
            oisFutureStretch,
            oisLongEndStretch
        };

        /*
         * Set up the Linear Curve Calibrator using the following parameters:
         *  - Cubic Exponential Mixture Basis Spline Set
         *  - Ck = 2, Segment Curvature Penalty = 2
         *  - Quadratic Rational Shape Controller
         *  - Natural Boundary Setting
         */

        LinearLatentStateCalibrator lcc = new LinearLatentStateCalibrator (
            new SegmentCustomBuilderControl (
                MultiSegmentSequenceBuilder.BASIS_SPLINE_POLYNOMIAL,
                new PolynomialFunctionSetParams (4),
                SegmentInelasticDesignControl.Create (
                    2,
                    2
                ),
                new ResponseScalingShapeControl (
                    true,
                    new QuadraticRationalShapeControl (0.)
                ),
                null
            ),
            BoundarySettings.NaturalStandard(),
            MultiSegmentSequence.CALIBRATE,
            null,
            null
        );

        /*
         * Construct the Shape Preserving Discount Curve by applying the linear curve calibrator to the array
         *  of Deposit and Swap Stretches.
         */

        ValuationParams valParams = new ValuationParams (
            dtSpot,
            dtSpot,
            strCurrency
        );

        MergedDiscountForwardCurve dc = ScenarioDiscountCurveBuilder.ShapePreservingDFBuild (
            strCurrency,
            lcc,
            aStretchSpec,
            valParams,
            null,
            null,
            null,
            1.
        );

        /*
         * Cross-Comparison of the Deposit Calibration Instrument "Rate" metric across the different curve
         *  construction methodologies.
         */

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

        System.out.println ("\t     DEPOSIT INSTRUMENTS CALIBRATION RECOVERY");

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

        for (int i = 0; i < aDepositComp.length; ++i)
            System.out.println ("\t[" + aDepositComp[i].effectiveDate() + " => " + aDepositComp[i].maturityDate() + "] = " +
                FormatUtil.FormatDouble (aDepositComp[i].measureValue (valParams, null,
                    MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                        null, "Rate"), 1, 6, 1.) + " | " + FormatUtil.FormatDouble (adblDepositQuote[i], 1, 6, 1.));

        /*
         * Cross-Comparison of the Short End OIS Calibration Instrument "Rate" metric across the different curve
         *  construction methodologies.
         */

        System.out.println ("\n\t----------------------------------------------------------------");

        System.out.println ("\t     OIS SHORT END INSTRUMENTS CALIBRATION RECOVERY");

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

        for (int i = 0; i < aShortEndOISComp.length; ++i)
            System.out.println ("\t[" + aShortEndOISComp[i].effectiveDate() + " => " + aShortEndOISComp[i].maturityDate() + "] = " +
                FormatUtil.FormatDouble (aShortEndOISComp[i].measureValue (valParams, null,
                    MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                        null, "CalibSwapRate"), 1, 6, 1.) + " | " + FormatUtil.FormatDouble (adblShortEndOISQuote[i], 1, 6, 1.) + " | " +
                            FormatUtil.FormatDouble (aShortEndOISComp[i].measureValue (valParams, null,
                                MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                                    null, "FairPremium"), 1, 6, 1.));

        /*
         * Cross-Comparison of the OIS Future Calibration Instrument "Rate" metric across the different curve
         *  construction methodologies.
         */

        System.out.println ("\n\t----------------------------------------------------------------");

        System.out.println ("\t     OIS FUTURE INSTRUMENTS CALIBRATION RECOVERY");

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

        for (int i = 0; i < aOISFutureComp.length; ++i)
            System.out.println ("\t[" + aOISFutureComp[i].effectiveDate() + " => " + aOISFutureComp[i].maturityDate() + "] = " +
                FormatUtil.FormatDouble (aOISFutureComp[i].measureValue (valParams, null,
                    MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                        null, "SwapRate"), 1, 6, 1.) + " | " + FormatUtil.FormatDouble (adblOISFutureQuote[i], 1, 6, 1.) + " | " +
                            FormatUtil.FormatDouble (aOISFutureComp[i].measureValue (valParams, null,
                                MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                                    null, "FairPremium"), 1, 6, 1.));

        /*
         * Cross-Comparison of the Long End OIS Calibration Instrument "Rate" metric across the different curve
         *  construction methodologies.
         */

        System.out.println ("\n\t----------------------------------------------------------------");

        System.out.println ("\t     OIS LONG END INSTRUMENTS CALIBRATION RECOVERY");

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

        for (int i = 0; i < aLongEndOISComp.length; ++i)
            System.out.println ("\t[" + aLongEndOISComp[i].effectiveDate() + " => " + aLongEndOISComp[i].maturityDate() + "] = " +
                FormatUtil.FormatDouble (aLongEndOISComp[i].measureValue (valParams, null,
                    MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                        null, "CalibSwapRate"), 1, 6, 1.) + " | " + FormatUtil.FormatDouble (adblLongEndOISQuote[i], 1, 6, 1.) + " | " +
                            FormatUtil.FormatDouble (aLongEndOISComp[i].measureValue (valParams, null,
                                MarketParamsBuilder.Create (dc, null, null, null, null, null, null),
                                    null, "FairPremium"), 1, 6, 1.));
    }

    public static final void main (
        final String[] astrArgs)
        throws Exception
    {
        /*
         * Initialize the Credit Analytics Library
         */

        EnvManager.InitEnv ("");

        String strCurrency = "EUR";

        JulianDate dtToday = DateUtil.CreateFromYMD (
            2012,
            DateUtil.DECEMBER,
            11
        );

        CustomOISCurveBuilderSample (
            dtToday,
            strCurrency,
            "OVERNIGHT INDEX RUN RECONCILIATION"
        );
    }
}