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Application Of The Kalman Filter For Estimating Continuous Time Term Structure Models: Evidence From The Uk And Germany

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  • Rana Chatterjee
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    Abstract

    In this paper a state-space representation for the single-factor Cox, Ingersoll and Ross (1985) model is employed to analyse the intertemporal dynamics of the term structure for UK Gilts and Euro-denominated German Treasury bonds. Closed form solutions for the prices of discount bonds are derived such that they are a function of the unobserved instantaneous spot rate and the model's parameters. Quasi-maximum likelihood estimates of the model parameters are obtained by using the Kalman filter algorithm to calculate the likelihood function. Empirical results show that a one-factor CIR model provides an adequate description of the dynamics of the UK term structure of interest rates for the period 1999-2003. But it is unable to provide such a good description of the German term structure owing to its inability to account for the market price of risk

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    File URL: http://repec.org/sce2004/up.28167.1081417641.pdf
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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 346.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:346

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    Keywords: Kalman filtering; term structure;

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    1. Duan, Jin-Chuan & Simonato, Jean-Guy, 1999. " Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter," Review of Quantitative Finance and Accounting, Springer, vol. 13(2), pages 111-35, September.
    2. Richard, Scott F., 1978. "An arbitrage model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 33-57, March.
    3. Geyer, Alois L J & Pichler, Stefan, 1999. "A State-Space Approach to Estimate and Test Multifactor Cox-Ingersoll-Ross Models of the Term Structure," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(1), pages 107-30, Spring.
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    Cited by:
    1. Nowman, Khalid Ben, 2010. "Modelling the UK and Euro yield curves using the Generalized Vasicek model: Empirical results from panel data for one and two factor models," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 334-341, December.

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