Nonparametric Pricing of Interest Rate Derivative Securities
The author proposes a nonparametric estimation procedure for continuous-time stochastic models. Because prices of derivative securities depend crucially on the form of the instantaneous volatility of the underlying process, he leaves the volatility function unrestricted and estimates it nonparametrically. Only discrete data are used but the estimation procedure still does not rely on replacing the continuous-time model by some discrete approximation. Instead, the drift and volatility functions are forced to match the densities of the process. The author estimates the stochastic differential equation followed by the short-term interest rate and computes nonparametric prices for bonds and bond options. Copyright 1996 by The Econometric Society.
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Volume (Year): 64 (1996)
Issue (Month): 3 (May)
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