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Genetic algorithm estimation of interest rate term structure

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  • 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/f/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 Espa�a in its series Banco de Espa�a 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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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. Álvarez, L. & Dhyne, E. & Hoeberichts, M. & Kwapil, C. & Le Bihan, H. & Lünnemann, P. & Martins, F. & Sabbatini, R. & Stahl,H. & Vermeulen, P. & Vilmunen, J., 2005. "Sticky Prices in the Euro Area: A Summary of New Micro Evidence," Working papers, Banque de France 138, Banque de France.
  2. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  3. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2005. "The pricing behaviour of firms in the Euro area: new survey evidence," Banco de Espa�a Working Papers, Banco de Espa�a 0536, Banco de Espa�a.
  4. K. C. Fung & Alicia Garcia-Herrero & Hitomi Iizaka & Alan Siu, 2005. "Hard Or Soft? Institutional Reforms And Infrastructure Spending As Determinants Of Foreign Direct Investment In China," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 56(4), pages 408-416.
  5. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Banco de Espa�a Working Papers, Banco de Espa�a 0627, Banco de Espa�a.
  6. Arturo Galindo & Alejandro Izquierdo & José M. Montero, 2006. "Real exchange rates, dollarization and industrial employment in Latin America," Banco de Espa�a Working Papers, Banco de Espa�a 0601, Banco de Espa�a.
  7. Álvarez, Luis J. & Hernando, Ignacio, 2005. "The price setting behaviour of Spanish firms: evidence from survey data," Working Paper Series, European Central Bank 0538, European Central Bank.
  8. Ruben Segura-Cayuela, 2006. "Inefficient Policies, Inefficient Institutions and Trade," 2006 Meeting Papers, Society for Economic Dynamics 502, Society for Economic Dynamics.
  9. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Banco de Espa�a Working Papers, Banco de Espa�a 0625, Banco de Espa�a.
  10. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Banco de Espa�a Working Papers, Banco de Espa�a 0527, Banco de Espa�a.
  11. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Banco de Espa�a Working Papers, Banco de Espa�a 0629, Banco de Espa�a.
  12. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Banco de Espa�a Working Papers, Banco de Espa�a 0621, Banco de Espa�a.
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Citations

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Cited by:
  1. Paul Beaumont & Yaniv Jerassy-Etzion, 2011. "Computing maximally smooth forward rate curves for coupon bonds: An iterative piecewise quartic polynomial interpolation method," Working Papers, Department of Economics, Florida State University wp2011_08_03, Department of Economics, Florida State University.
  2. Vermeulen, Philip & Dias, Daniel & Dossche, Maarten & Gautier, Erwan & Hernando, Ignacio & Sabbatini, Roberto & Stahl, Harald, 2007. "Price setting in the euro area: some stylised facts from individual producer price data," Working Paper Series, European Central Bank 0727, European Central Bank.
  3. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 7(1), pages 1-35, April.
  4. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, 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, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration) 12.06, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  6. Eder, Armin & Keiler, Sebastian & Pichl, Hannes, 2013. "Interest rate risk and the Swiss solvency test," Discussion Papers 41/2013, Deutsche Bundesbank, Research Centre.

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