| Interest rate model risk is considered in the debt management environment by applying different interest rate models to a debt portfolio strategy problem. A path-wise method for assessing interest rate model risk in a simulation environment is proposed. Applying a variety of interest rate models on a debt portfolio shows that the choice of interest rate model has a significant effect on measures of debt cost and risk. For long-term risk management problems, it is necessary and prudent to consider a variety of interest rate models including those with macroeconomic factors. Hence, six joint macroeconomic term structure models are implemented, described and estimated with Canadian interest rate and macroeconomic data. One of the six joint macroeconomic term structure models, which is a member of the affine family, is introduced here for the first time. In general, the empirical joint macroeconomic model provides the most appealing modelling alternative of those considered here. Finally, the use of swing options to manage the liquidity risk of debt issuance is proposed. Swing options have been used in commodity markets as a means for consumers to control the delivery amount and timing of the underlying asset. We provide evidence that swing options can be an effective risk management tool for regular issuers and purchasers of securities.;Keywords. Debt Management, Interest Rate Models, Risk Management, Swing Options. |
