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Application of teh Kalman Filter to Interest Rate Modelling

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  • Ibhagui, Oyakhilome

Abstract

We give a mild introduction to the Kalman filter and the generalized Vasicek models of the term structure of interest rates with special attention to the application of the Kalman filter equations to one-and two-factor models. After thoroughly reviewing the essential tools that constitute the Kalman filter and the generalized Vasicek models of the term structure of interest rates, we derive the yield on a zero coupon bond with infinite maturity and the Kalman �filter equations of the state space formulation of the generalized Vasicek models. By performing simulations, we illustrate how the Kalman �filter works and the major weakness of the Vasicek model.

Suggested Citation

  • Ibhagui, Oyakhilome, 2010. "Application of teh Kalman Filter to Interest Rate Modelling," MPRA Paper 93297, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:93297
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    File URL: https://mpra.ub.uni-muenchen.de/93297/1/MPRA_paper_93297.pdf
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    References listed on IDEAS

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    1. Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(1), pages 115-130, March.
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    Cited by:

    1. Georgina Onuma Kalu & Chinemerem Dennis Ikpe & Benjamin Ifeanyichukwu Oruh & Samuel Asante Gyamerah, 2020. "State Space Vasicek Model of a Longevity Bond," Papers 2011.12753, arXiv.org.

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    More about this item

    Keywords

    Interest Rate Modelling; Kalman Filtering; Vasicek Model;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General

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