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Nonparametric estimation of convergence of interest rates: Effects on bond pricing

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  • Teresa Corzo Santamaría
  • Javier Gómez Biscarri

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, especially for short-term assets, than alternative models. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Teresa Corzo Santamaría & Javier Gómez Biscarri, 2005. "Nonparametric estimation of convergence of interest rates: Effects on bond pricing," Spanish Economic Review, Springer;Spanish Economic Association, vol. 7(3), pages 167-190, September.
    • Handle: RePEc:spr:specre:v:7:y:2005:i:3:p:167-190
    DOI: 10.1007/s10108-004-0094-2
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    More about this item

    Keywords

    Nonparametric estimation; convergence of interest rates; continuous time; bond valuation;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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