Improving the Quality of the Input in the Term Structure Consistent Models
AbstractIn finance, getting an accurate estimation of the term structure of interest rates is essential because this information is often used as input by other pricing financial models. In this paper, we point out the importance of selecting a suitable estimation of the term structure of interest rates. To show this fact, we use the Spanish Bond Market to estimate the initial interest rate and forward curves for one day, by using both McCulloch (1975) cubic polynomial splines, and Legendre's polynomials (Morini, 1998). We use these curves as input for pricing pure discount bonds with the Ho and Lee (1986) and Hull and White (1990) models. Then, we find the important result that using an inadequate interest rate curve affects dramatically the behaviour of the dynamic term structure models and, consequently, the estimation of the asset pricing models
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 70.
Date of creation: 01 Sep 2001
Date of revision:
Term structure of interest rates; dynamic consistent models;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
- McCulloch, J Huston, 1971.
"Measuring the Term Structure of Interest Rates,"
The Journal of Business,
University of Chicago Press, vol. 44(1), pages 19-31, January.
- Tom Doan, . "RATS program to estimate term structure with cubic splines," Statistical Software Components RTZ00019, Boston College Department of Economics.
- Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December.
- Chris Strickland, 1996. "A comparison of diffusion models of the term structure," The European Journal of Finance, Taylor & Francis Journals, vol. 2(1), pages 103-123.
- Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio).
If references are entirely missing, you can add them using this form.