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Estimation of continuous-time interest rate models: a nonparametric approach

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  • Orazio Di Miscia

    (Banca Intesa)

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    Abstract

    This paper presents a general, nonlinear model for term structure interest rate. The approach is the same of Stanton (1997) but it has been extended to a multifactor model. The novel aspect is that rather than choosing the functional specification of the model, the process is generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short and long end of the term structure for a general two-factor diffusion process for interest rates is possible to find some interesting nonlinearity in the interest rate data that are not considered in almost all parametric specifications of term structure interest rate model of the financial literature.

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    File URL: http://128.118.178.162/eps/fin/papers/0504/0504015.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 0504015.

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    Length: 39 pages
    Date of creation: 19 Apr 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0504015

    Note: Type of Document - pdf; pages: 39
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    Web page: http://128.118.178.162

    Related research

    Keywords: continuous-time models; nonparametric estimation; multi-factor interest rate model;

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    1. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
    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. Pearson, Neil D & Sun, Tong-Sheng, 1994. " Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model," Journal of Finance, American Finance Association, vol. 49(4), pages 1279-1304, September.
    4. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-82, September.
    5. Andrew W. Lo, 1986. "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," NBER Technical Working Papers 0059, National Bureau of Economic Research, Inc.
    6. Schaefer, Stephen M. & Schwartz, Eduardo S., 1984. "A Two-Factor Model of the Term Structure: An Approximate Analytical Solution," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(04), pages 413-424, December.
    7. David Backus & Silverio Foresi & Stanley Zin, 1996. "Arbitrage Opportunities in Arbitrage-Free Models of Bond Pricing," NBER Working Papers 5638, National Bureau of Economic Research, Inc.
    8. Hansen, Lars Peter & Scheinkman, Jose Alexandre, 1995. "Back to the Future: Generating Moment Implications for Continuous-Time Markov Processes," Econometrica, Econometric Society, vol. 63(4), pages 767-804, July.
    9. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
    10. Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-60, May.
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