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Estimation of continuous-time interest rate models: a nonparametric approach

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  • Orazio Di Miscia

    (Banca Intesa)

Abstract

This paper presents a general, nonlinear model for term structure interest rate. The approach is the same of Stanton (1997) but it has been extended to a multifactor model. The novel aspect is that rather than choosing the functional specification of the model, the process is generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short and long end of the term structure for a general two-factor diffusion process for interest rates is possible to find some interesting nonlinearity in the interest rate data that are not considered in almost all parametric specifications of term structure interest rate model of the financial literature.

Suggested Citation

  • Orazio Di Miscia, 2005. "Estimation of continuous-time interest rate models: a nonparametric approach," Finance 0504015, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0504015
    Note: Type of Document - pdf; pages: 39
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    References listed on IDEAS

    as
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    6. Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-560, May.
    7. Schaefer, Stephen M. & Schwartz, Eduardo S., 1984. "A Two-Factor Model of the Term Structure: An Approximate Analytical Solution," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(4), pages 413-424, December.
    8. Pearson, Neil D & Sun, Tong-Sheng, 1994. "Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model," Journal of Finance, American Finance Association, vol. 49(4), pages 1279-1304, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    continuous-time models; nonparametric estimation; multi-factor interest rate model;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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