Monte Carlo Simulation for Vasicek Interest Rate Model Parameters

Abstract

Modeling interest rates is an important issue in Turkey with new government regulations on capital requirement for insurance companies. These regulations called Solvency II have new standards for calculating capital requirement. There are sub risk groups in Solvency Capital Requirement (SCR) calculations of Solvency II. This study focuses on interest rate risk for SCR and time series of TRLIBOR interest rates which is between 2.01.2008 and 5.12.2012 are modeled with Vasicek Model and calibrated through OLS method. The distributions of estimation’s parameters are obtained by using Monte Carlo Simulation. Thus, not only parameters are estimated but also confidence intervals are given.