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

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  • Teresa Corzo Santamaría

    ()
    (Renta 4)

  • Javier Gómez Biscarri

    ()
    (School of Economics and Business Administration, University of Navarra)

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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Bibliographic Info

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
Date of revision:
Publication status: Published, Spanish Economic Review, 2005, vol. 7(3): pp. 167-190
Handle: RePEc:una:unccee:wp0304

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Web page: http://www.unav.es/facultad/econom

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Cited by:
  1. Lourdes Gómez-Valle & Julia Mart�nez-Rodr�guez, 2010. "Improving the term structure of interest rates: two-factor models," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 275-287.

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