IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Nonparametric Estimation of Multifactor Continuous Time Interest-Rate Models

  • Christopher T. Downing

    ()

    (Board of Governors, Federal Reserve)

Registered author(s):

    In this paper we study the finite sample properties of the nonparametric method developed by Stanton and later extended by Boudoukh, et al. for the estimation of the drifts and diffusions of multifactor continuous-time term-structure models. Monte Carlo simulations from a known parametric model are employed to calculate the performance of the estimator. The paper focuses on the issue of optimal bandwidth selection. The results suggest that, for persistent data-generating processes exhibiting stochastic volatility, such as interest rate data, a bandwidth function that varies over the surface of the data is optimal. The paper also presents a computationally intensive bandwidth-selection procedure that uses dynamic graphics, combining the computational power of the machine with the pattern-recognition abilities of the human brain. The Monte Carlo simulations require the numeric solution of a system of stochastic differential equations. The paper also presents a nonparametric test for the validity of the solutions. This test is useful in other estimation algorithms, such as the efficient method of moments, where numeric solutions of stochastic differential equations are required. The test is also useful as a tool for understanding how the length of the time step used in the numeric solution of the stochastic differential solutions affects the accuracy of the solution.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://fmwww.bc.edu/cef99/papers/NONP.PDF
    File Function: main text
    Download Restriction: no

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 111.

    as
    in new window

    Length:
    Date of creation: 01 Mar 1999
    Date of revision:
    Handle: RePEc:sce:scecf9:111
    Contact details of provider: Postal: CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA
    Fax: +1-617-552-2308
    Web page: http://fmwww.bc.edu/CEF99/
    More information through EDIRC

    References listed on IDEAS
    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.:

    as in new window
    1. Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
    2. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
    3. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
    4. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
    5. Hardle, Wolfgang & Linton, Oliver, 1986. "Applied nonparametric methods," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 38, pages 2295-2339 Elsevier.
    6. Pritsker, Matt, 1998. "Nonparametric Density Estimation and Tests of Continuous Time Interest Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 449-87.
    7. David A. Chapman & Neil D. Pearson, 1998. "Is the Short Rate Drift Actually Nonlinear?," Finance 9808005, EconWPA.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:sce:scecf9:111. 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: (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.