How machine learning could aid interest rate modelling - Risk.net

Quants are in the business of making helpful assumptions around modelling the characteristics of an asset. But when it comes to interest rates, many of those simplifying conventions tend to break down. That has prompted a growing number of quants to explore the use of machine-learning techniques to better predict the term structure of interest rates. For instance, it is not uncommon to model stock price returns by assuming they are driven by a normal distribution and a volatility that is independent of the level of the stock. But movements in interest rates have been shown to depend heavily on the absolute level of rates at a given point in time.