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Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach

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Abstract

The volatility structure of 90-day bill futures traded on the the Sydney Futures Exchange is analysed within the framework of the Heath-Jarrow-Morton model. The method involves characterisation of the transition probability density function for the forward rate process represented by the stochastic differential equation in the arbitrage-free economy. Maximisation of the likelihood function then results in the estimates of the parameters of the volatility function. The volatility function is also used in a simulation of the preference-free stochastic differential equation for bill prices.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp56.pdf
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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 56.

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Length: 30 pages
Date of creation: 01 Dec 1995
Date of revision:
Handle: RePEc:uts:wpaper:56

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  1. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  2. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July.
  3. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June.
  4. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  5. Andrew W. Lo, . "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," Rodney L. White Center for Financial Research Working Papers 15-86, Wharton School Rodney L. White Center for Financial Research.
  6. Marc Chesney & Robert J. Elliott & Dilip Madan & Hailiang Yang, 1993. "Diffusion Coefficient Estimation and Asset Pricing When Risk Premia and Sensitivities Are Time Varying," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 85-99.
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Cited by:
  1. Ram Bhar & Carl Chiarella, 1996. "Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data," Working Paper Series 70, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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