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Modeling the yield curve of spot interest rates under the conditions in Bulgaria

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  • Ganchev, Alexander

Abstract

The article investigate the accuracy and stability of quantitative models for modeling of the spot rate curve under the Bulgarian conditions. The empirical analysis does not single out the best model for modeling the spot interest curve although it shows that the model with the worst performance considering all quantitative criteria is the model of Nelson and Siegel.The empirical results show that despite their accuracy the models proposed by Svensson, Vasicek, and El Karoui, Cherif, Dicoum, and Savidan are not stable. On the other hand the model proposed by Martellini and Priaulet stands out with its greater performance stability. The combination of its satisfactory stability and ability to model correctly the bond prices makes this model the most appropriate method for modeling the spot interest rates curve in Bulgaria.

Suggested Citation

  • Ganchev, Alexander, 2009. "Modeling the yield curve of spot interest rates under the conditions in Bulgaria," MPRA Paper 70048, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:70048
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    File URL: https://mpra.ub.uni-muenchen.de/70048/1/MPRA_paper_70048.pdf
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    References listed on IDEAS

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    1. Shea, Gary S., 1984. "Pitfalls in Smoothing Interest Rate Term Structure Data: Equilibrium Models and Spline Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 253-269, September.
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    3. Vasicek, Oldrich A & Fong, H Gifford, 1982. " Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    4. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    5. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    6. Tomas Björk & Bent Jesper Christensen, 1999. "Interest Rate Dynamics and Consistent Forward Rate Curves," Mathematical Finance, Wiley Blackwell, vol. 9(4), pages 323-348.
    7. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    8. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    9. Attila Csajbók, 1998. "Zero-coupon yield curve estimation from a central bank perspective," MNB Working Papers 1998/2, Magyar Nemzeti Bank (Central Bank of Hungary).
    10. David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
    11. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    12. Choudhry, Moorad, 2001. "Bond and Money Markets: Strategy, Trading, Analysis," Elsevier Monographs, Elsevier, edition 1, number 9780750646772.
    13. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
    14. 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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    More about this item

    Keywords

    Yield curve; yield curve modelling; spot interest rates;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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