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Genetic algorithm estimation of interest rate term structure

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Author Info

  • Ricardo Gimeno

    () (Banco de España)

  • Juan M. Nave

    () (Universidad CEU Cardenal Herrera)

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.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0634e.pdf
File Function: First version, December 2006
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Bibliographic Info

Paper provided by Banco de España in its series Banco de España Working Papers with number 0634.

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Length: 35 pages
Date of creation: Dec 2006
Date of revision:
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;

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References

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  1. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & Fernando Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence," Working Papers w200510, Banco de Portugal, Economics and Research Department.
  2. Álvarez, L. & Dias, D. & Dhyne, E. & Hoffmann, J. & Jonker, N. & Le Bihan, H. & Lünnemann, P. & Rumler, F. & Veronese, G. & Vilmunen, J., 2005. "Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data," Working papers 136, Banque de France.
  3. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Banco de España Working Papers 0625, Banco de España.
  4. Arturo Galindo & Alejandro Izquierdo & José Manuel Montero, 2006. "Real Exchange Rates, Dollarization and Industrial Employment in Latin America," Research Department Publications 4478, Inter-American Development Bank, Research Department.
  5. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of spanish firms - evidence from survey data," Working Paper Series 538, European Central Bank.
  6. Luis J. �lvarez & Pablo Burriel & Ignacio Hernando, 2010. "Price-setting behaviour in Spain: evidence from micro PPI data," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 105-121.
  7. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Banco de España Working Papers 0629, Banco de España.
  8. Fung, K. C. & Garcia-Herrero, Alicia & Iizaka, Hitomi & Siu, Alan, 2005. "Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China," Santa Cruz Department of Economics, Working Paper Series qt9377h519, Department of Economics, UC Santa Cruz.
  9. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Banco de España Working Papers 0627, Banco de España.
  10. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Banco de España Working Papers 0621, Banco de España.
  11. Ruben Segura-Cayuela, 2006. "Inefficient Policies, Inefficient Institutions and Trade," 2006 Meeting Papers 502, Society for Economic Dynamics.
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Cited by:
  1. Philip Vermeulen & Daniel A. Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2012. "Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1631-1650, December.
  2. Paul Beaumont & Yaniv Jerassy-Etzion, 2011. "Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method," Working Papers wp2011_08_03, Department of Economics, Florida State University.
  3. Kujal, Praveen & Ruiz, Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5354, Universidad Carlos III de Madrid.
  4. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
  5. Emma Berenguer-Carceles & Ricardo Gimeno & Juan M. Nave, 2012. "Estimation of the Term Structure of Interest Rates: Methodology and Applications," Working Papers 12.06, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).

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