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Nonlinear Mean Reversion In The Term Structure Of Interest Rates

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  • Byeongseon Seo

    (Soongsil University)

Abstract

An important factor of regional development is innovative process. The innovations include new products, new technologies, new ways of commercial use of goods, conquering of new markets, new sources of raw materials and other qualitative trahsformations which can change current economic situation. Now they become the basic buisness strategies, main sources of welfare and development in which knowledge and social capital create the competitive advatages of regions more than their natural resources.The main methodological problem of modeling such processes is that they are incorporated into real picture of development whereas it is necessary to separate them from other processes to perform their fruitful analysis, in particular to compare the related costs with the total resulted effect. Our approach to solve this problem is to modify a familiar previously created model without innovations via addition a special submodel which describe visually the innovative processes, as favorable change of originally constant model parameters.The main difficulty arise when we attempt to present strictly the dynamics of great amount of the original model parameters (about square of the number of original variables). To overcome this difficulty the opportunity of aggregative description of innovative block with different levels of aggregation variable is provided.The modified model structure becomes essentially nonlinear and does not allow to apply strictly the special high effective optimization method which make use of lineariyies in the original model. For this reason a multistep optimization procedure is developed where optimization of the original model with given parameters is accompanied by their inprovement on account of control in the innovative submodel. The approach proposed is demonstrated by concrete application to Pereslavl region of Russia.

Suggested Citation

  • Byeongseon Seo, 2000. "Nonlinear Mean Reversion In The Term Structure Of Interest Rates," Computing in Economics and Finance 2000 121, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:121
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