Genetic algorithm estimation of interest rate term structure
Abstract
The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms - as proposed by Nelson and Siegel (1987) and Svensson (1994) - is the most popular technique. This method is based on bond yields to maturity and the high degree of non linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restrictions.Download Info
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Paper provided by Banco de España in its series Banco de España Working Papers with number 0634.Length: 35 pages
Date of creation: Dec 2006
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Handle: RePEc:bde:wpaper:0634
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Related research
Keywords: forward and spot interest rates; nelson and siegel model; non-linear optimization; numerical methods; svensson model; yield curve estimation;Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-24 (All new papers)
- NEP-CMP-2007-02-24 (Computational Economics)
- NEP-ECM-2007-02-24 (Econometrics)
- NEP-ICT-2007-02-24 (Information & Communication Technologies)
- NEP-MON-2007-02-24 (Monetary Economics)
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"Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data,"
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