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Consistent Long-Term Yield Curve Prediction

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  • Josef Teichmann
  • Mario V. Wuthrich

Abstract

We present an arbitrage-free non-parametric yield curve prediction model which takes the full (discretized) yield curve as state variable. We believe that absence of arbitrage is an important model feature in case of highly correlated data, as it is the case for interest rates. Furthermore, the model structure allows to separate clearly the tasks of estimating the volatility structure and of calibrating market prices of risk. The empirical part includes tests on modeling assumptions, back testing and a comparison with the Vasi\v{c}ek short rate model.

Suggested Citation

  • Josef Teichmann & Mario V. Wuthrich, 2012. "Consistent Long-Term Yield Curve Prediction," Papers 1203.2017, arXiv.org.
    • Handle: RePEc:arx:papers:1203.2017
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    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    4. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
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    Cited by:

    1. Philipp Harms & David Stefanovits & Josef Teichmann & Mario Wuthrich, 2015. "Consistent Recalibration of Yield Curve Models," Papers 1502.02926, arXiv.org, revised Sep 2016.

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