Application Of The Kalman Filter For Estimating Continuous Time Term Structure Models: Evidence From The Uk And Germany
AbstractIn 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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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 346.
Date of creation: 11 Aug 2004
Date of revision:
Kalman filtering; term structure;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
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CIRANO Working Papers
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