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Gaussian estimation and forecasting of the U.K. yield curve with multi-factor continuous-time models

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  • Tunaru, Diana

Abstract

In this paper we will estimate the term structure of daily U.K. interest rates using a range of more flexible continuous-time models. A multivariate framework is employed for the dynamic estimation and forecasting of four classic models over the eventful period of 2000–2013. The extensions are applied in two stages to four- and five-factor formulations, allowing us to assess the potential benefit of gradually increasing the model-flexibility. The Gaussian estimation methods for dynamic continuous-time models yield insightful comparative results concerning the two different segments of the yield curve, short- and long-term, respectively. In terms of in-sample performance the newly extended multi-factor general model is superior to all other restricted models. When compared to benchmark discrete-time models, the out-of-sample performance of the extended continuous-time models seems to be consistently superior with regards to the short-term segment of the yield curve.

Suggested Citation

  • Tunaru, Diana, 2017. "Gaussian estimation and forecasting of the U.K. yield curve with multi-factor continuous-time models," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 119-129.
  • Handle: RePEc:eee:finana:v:52:y:2017:i:c:p:119-129
    DOI: 10.1016/j.irfa.2017.05.003
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    Cited by:

    1. Sikora, Grzegorz & Michalak, Anna & Bielak, Łukasz & Miśta, Paweł & Wyłomańska, Agnieszka, 2019. "Stochastic modeling of currency exchange rates with novel validation techniques," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 1202-1215.

    More about this item

    Keywords

    Continuous-time models; Forecasting; Gaussian estimation; Multi-factor diffusion models with feedbacks; Term structure of interest rates;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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