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

Nonparametric Estimation of Convergence of Interest Rates: Effects on Bond Pricing

  • Teresa Corzo Santamaría

    ()

    (Renta 4)

  • Javier Gómez Biscarri

    ()

    (School of Economics and Business Administration, University of Navarra)

We present and estimate a model of short term interest rate dynamics where we incorporate the convergent behavior of interest rates implied by the transition to EMU. We apply this model to data of two EMU countries -Spain and Italy- and compare the performance, in terms of accuracy of bond pricing, of this two-factor convergence model with alternative specifications. Nonparametric techniques are used for the estimation of the processes. The two-factor model which accounts for the convergence with Europe of the domestic economies, obtains better results than alternative models mainly for short-term assets. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives.

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://www.unav.es/facultad/econom/files/workingpapersmodule/@random437a054f974a0/1132585082_wp0304.pdf
Download Restriction: no

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 03/04.

as
in new window

Length: 42 pages pages
Date of creation: Mar 2004
Date of revision:
Publication status: Published, Spanish Economic Review, 2005, vol. 7(3): pp. 167-190
Handle: RePEc:una:unccee:wp0304
Contact details of provider: Web page: http://www.unav.es/facultad/econom

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. Eric Ghysels & Serena Ng, 1998. "A Semi-Parametric Factor Model of Interest Rates and Tests of the Affine Term Structure," Boston College Working Papers in Economics 403, Boston College Department of Economics.
  2. Backus, D.K. & Foresi, S. & Zin, S.E., 1994. "Arbitrage Opportunities in Arbitrage-Free Models of Bond Pricing," Papers 95-02, Columbia - Graduate School of Business.
  3. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  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. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July.
  6. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
  7. repec:ner:tilbur:urn:nbn:nl:ui:12-3108628 is not listed on IDEAS
  8. Pagan, A.R. & Hall, A.D. & Martin, V., 1995. "Modelling the Term Structure," Papers 284, Australian National University - Department of Economics.
  9. Pfann, Gerard A. & Schotman, Peter C. & Tschernig, Rolf, 1996. "Nonlinear interest rate dynamics and implications for the term structure," Journal of Econometrics, Elsevier, vol. 74(1), pages 149-176, September.
  10. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
  11. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
  12. Mark Broadie & Jérôme B. Detemple & Eric Ghysels & Olivier Torrès, 1996. "Nonparametric Estimation of American Options Exercise Boundaries and Call Prices," CIRANO Working Papers 96s-24, CIRANO.
  13. Teresa Corzo Santamaria & E. S. Schwartz, 2000. "Convergence within the EU: Evidence from Interest Rates," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(2), pages 243-266, 07.
  14. Christopher S. Jones, 2003. "Nonlinear Mean Reversion in the Short-Term Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 793-843, July.
  15. Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-60, May.
  16. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
  17. Bali, Turan G., 2003. "Modeling the stochastic behavior of short-term interest rates: Pricing implications for discount bonds," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 201-228, February.
  18. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  19. Hansen, Lars Peter & Scheinkman, Jose Alexandre, 1995. "Back to the Future: Generating Moment Implications for Continuous-Time Markov Processes," Econometrica, Econometric Society, vol. 63(4), pages 767-804, July.
  20. Boudoukh, Jacob, et al, 1997. "Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 405-46.
  21. Gabriele Fiorentini & Angel León & Gonzalo Rubio, . "Short-term options with stochastic volatility: Estimation and empirical performance," Studies on the Spanish Economy 02, FEDEA.
  22. Guo, Dajiang, 1998. "The Risk Premium of Volatility Implicit in Currency Options," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 498-507, October.
  23. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  24. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-82, September.
  25. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
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:una:unccee:wp0304. 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: ()

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.