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Nonparametric Estimation of Convergence of Interest Rates: Effects on Bond Pricing

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Author Info
Teresa Corzo Santamaría () (Renta 4)
Javier Gómez Biscarri () (School of Economics and Business Administration, University of Navarra)

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Abstract

We present and estimate a model of short term interest rate dynamics where we incorporate the convergent behavior of interest rates implied by the transition to EMU. We apply this model to data of two EMU countries -Spain and Italy- and compare the performance, in terms of accuracy of bond pricing, of this two-factor convergence model with alternative specifications. Nonparametric techniques are used for the estimation of the processes. The two-factor model which accounts for the convergence with Europe of the domestic economies, obtains better results than alternative models mainly for short-term assets. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives.

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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 03/04.

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Length: 42 pages pages
Date of creation: Mar 2004
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Publication status: Forthcoming, Spanish Economic Review
Handle: RePEc:una:unccee:wp0304

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods

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