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On the Choice of Optimization Routine in Estimation of Parsimonious Term Structure Models: Results from the Svensson Model

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  • Virmani, Vineet

Abstract

Objective function in term structure estimation with price errors is not only non-linear but also non-convex in parameters. This makes the final results sensitive to both the choice of the optimization routine as well as to the starting guess. This study looks at the impact of the choice of the optimization routine to final parameter estimates for the Svensson model. While results are expected to differ numerically across routines, what is of interest is the economic impact. Using eleven different routines over a range of starting parameter values, it is found while there is significant variation in the final objective function value across routines, for the most part, implied short-rates and long-rates have low standard deviation. Also, while grid-search seems unavoidable, popular quasi-Newton methods allowing for linear constraints seem quite adequate for the task at hand.

Suggested Citation

  • Virmani, Vineet, 2013. "On the Choice of Optimization Routine in Estimation of Parsimonious Term Structure Models: Results from the Svensson Model," IIMA Working Papers WP2013-01-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:11470
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    References listed on IDEAS

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    1. Vineet Virmani, 2012. "On estimability of parsimonious term structure models: an experiment with the Nelson–Siegel specification," Applied Economics Letters, Taylor & Francis Journals, vol. 19(17), pages 1703-1706.
    2. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    3. Manfred Gilli & Stefan Große & Enrico Schumann, 2010. "Calibrating the Nelson–Siegel–Svensson model," Working Papers 031, COMISEF.
    4. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    5. 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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    1. Julián Andrada-Félix & Adrian Fernandez-Perez & Fernando Fernández-Rodríguez, 2015. "Fixed income strategies based on the prediction of parameters in the NS model for the Spanish public debt market," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(2), pages 207-245, June.

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