MCMC Based Estimation of Term Structure Models
We develop a state space framework for estimating term structure models, where latent Markovian state variables are mapped non-linearly into observable market data. The measurement equation of our framework is explicitly constructed such that it takes raw market prices and rates as direct inputs. We thus avoid entirely, the need for data preprocessing, such as the use of ad hoc interpolation and data smoothing techniques. As our general estimation approach, we demonstrate how Markov chain Monte Carlo techniques are well suited for handling complex functional relations between state vari-ables and data, parameter restrictions and other features of popular term structure mod-els, which have proved hard to handle for alternative econometric techniques. Our estimation framework therefore handles popular multi-factor model specifications such as exponential affine and quadratic models, but facilitates richer Markovian HJM model specifications as well. Efficient Markov chain Monte Carlo implementations are highly model dependent. Therefore, having developed the general estimation principles of our framework, we demonstrate how one could approach sampler specification for a particular model example which we fit to a panel data set of swap and money market rates.
|Date of creation:||21 May 2001|
|Date of revision:|
|Contact details of provider:|| Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark|
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrews, Donald W K, 1991.
"Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation,"
Econometric Society, vol. 59(3), pages 817-58, May.
- Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
- Siddhartha Chib & Edward Greenberg, 1994.
"Markov Chain Monte Carlo Simulation Methods in Econometrics,"
9408001, EconWPA, revised 24 Oct 1994.
- Chib, Siddhartha & Greenberg, Edward, 1996. "Markov Chain Monte Carlo Simulation Methods in Econometrics," Econometric Theory, Cambridge University Press, vol. 12(03), pages 409-431, August.
- repec:cup:etheor:v:12:y:1996:i:3:p:409-31 is not listed on IDEAS
- Björk, Tomas & Christensen, Bent Jesper, 1997.
"Interest Rate Dynamics and Consistent Forward Rate Curves,"
SSE/EFI Working Paper Series in Economics and Finance
209, Stockholm School of Economics.
- Tomas Björk & Bent Jesper Christensen, 1999. "Interest Rate Dynamics and Consistent Forward Rate Curves," Mathematical Finance, Wiley Blackwell, vol. 9(4), pages 323-348.
- Sandmann, Gleb & Koopman, Siem Jan, 1998. "Estimation of stochastic volatility models via Monte Carlo maximum likelihood," Journal of Econometrics, Elsevier, vol. 87(2), pages 271-301, September.
- Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
- Durbin, J. & Koopman, S.J.M., 1998.
"Time Series Analysis of Non-Gaussian Observations Based on State Space Models from Both Classical and Bayesian Perspectives,"
1998-142, Tilburg University, Center for Economic Research.
- J. Durbin & S. J. Koopman, 2000. "Time series analysis of non-Gaussian observations based on state space models from both classical and Bayesian perspectives," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 62(1), pages 3-56.
- Chan, K C, et al, 1992.
" An Empirical Comparison of Alternative Models of the Short-Term Interest Rate,"
Journal of Finance,
American Finance Association, vol. 47(3), pages 1209-27, July.
- Tom Doan, . "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford.
- Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994.
"Bayesian Analysis of Stochastic Volatility Models,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 12(4), pages 371-89, October.
- Tom Doan, . "RATS programs to replicate Jacquier, Polson, Rossi (1994) stochastic volatility," Statistical Software Components RTZ00105, Boston College Department of Economics.
- Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
When requesting a correction, please mention this item's handle: RePEc:hhb:aarfin:2001_007. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helle Vinbaek Stenholt)
If references are entirely missing, you can add them using this form.