Application Of The Kalman Filter For Estimating Continuous Time Term Structure Models: Evidence From The Uk And Germany
In this paper a state-space representation for the single-factor Cox, Ingersoll and Ross (1985) model is employed to analyse the intertemporal dynamics of the term structure for UK Gilts and Euro-denominated German Treasury bonds. Closed form solutions for the prices of discount bonds are derived such that they are a function of the unobserved instantaneous spot rate and the model's parameters. Quasi-maximum likelihood estimates of the model parameters are obtained by using the Kalman filter algorithm to calculate the likelihood function. Empirical results show that a one-factor CIR model provides an adequate description of the dynamics of the UK term structure of interest rates for the period 1999-2003. But it is unable to provide such a good description of the German term structure owing to its inability to account for the market price of risk
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- Geyer, Alois L J & Pichler, Stefan, 1999.
"A State-Space Approach to Estimate and Test Multifactor Cox-Ingersoll-Ross Models of the Term Structure,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 22(1), pages 107-30, Spring.
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"Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter,"
Review of Quantitative Finance and Accounting,
Springer, vol. 13(2), pages 111-35, September.
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- Richard, Scott F., 1978. "An arbitrage model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 33-57, March.
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