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On Filtering in Markovian Term Structure Models

In: Recent Developments In Mathematical Finance

Author

Listed:
  • Carl Chiarella

    (School of Finance and Economics, University of Technology Sydney, PO Box 123, Broadway NSW 2007, Australia)

  • Sara Pasquali

    (Dipartimento di Matematica, Università degli Studi di Parma, 85, Via M. D'Azeglio, I - 43100 Parma, Italy)

  • Wolfgang J. Runggaldier

    (Dipartimento di Matematica Pura ed Applicata, Università di Padova, 7 Via Belzoni, I - 3513lPadova, Italy)

Abstract

We study a nonlinear filtering problem to estimate the market price of risk as well as the parameters in a given term structure model on the basis of noisy observations of forward rates. An approximation approach is described for the actual computation of the filter.

Suggested Citation

  • Carl Chiarella & Sara Pasquali & Wolfgang J. Runggaldier, 2001. "On Filtering in Markovian Term Structure Models," World Scientific Book Chapters, in: Jiongmin Yong (ed.), Recent Developments In Mathematical Finance, chapter 12, pages 139-150, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812799579_0012
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    References listed on IDEAS

    as
    1. Carl Chiarella & Oh Kang Kwon, 2001. "Forward rate dependent Markovian transformations of the Heath-Jarrow-Morton term structure model," Finance and Stochastics, Springer, vol. 5(2), pages 237-257.
    2. Tomas Björk & Lars Svensson, 2001. "On the Existence of Finite‐Dimensional Realizations for Nonlinear Forward Rate Models," Mathematical Finance, Wiley Blackwell, vol. 11(2), pages 205-243, April.
    3. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    4. Ram Bhar & Carl Chiarella & Wolfgang Runggaldier, 2001. "Estimation in Models of the Instantaneous Short Term Interest Rate By Use of a Dynamic Bayesian Algorithm," Research Paper Series 68, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Chapman, David A & Long, John B, Jr & Pearson, Neil D, 1999. "Using Proxies for the Short Rate: When Are Three Months Like an Instant?," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 763-806.
    6. Griselda Deelstra & Freddy Delbaen, 1998. "Convergence of discretised stochastic interest rate: processes with stochastic drift term," ULB Institutional Repository 2013/7584, ULB -- Universite Libre de Bruxelles.
    7. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    8. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    9. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    10. Peter Ritchken & L. Sankarasubramanian, 1995. "Volatility Structures Of Forward Rates And The Dynamics Of The Term Structure1," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 55-72, January.
    11. Ram Bhar & Carl Chiarella & Nadima El-Hassan & Xiaosu Zheng, 2000. "The Reduction of Forward Rate Dependent Volatility HJM Models to Markovian Form: Pricing European Bond Option," Research Paper Series 36, Quantitative Finance Research Centre, University of Technology, Sydney.
    12. Björk, Tomas, 2000. "A Geometric View of Interest Rate Theory," SSE/EFI Working Paper Series in Economics and Finance 419, Stockholm School of Economics, revised 21 Dec 2000.
    13. G. Deelstra & F. Delbaen, 1998. "Convergence of discretized stochastic (interest rate) processes with stochastic drift term," Applied Stochastic Models and Data Analysis, John Wiley & Sons, vol. 14(1), pages 77-84, March.
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    Cited by:

    1. Yassine El Qalli, 2010. "Recursive Bayesian Estimation In Forward Price Models Implied By Fair Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 301-333.
    2. Ram Bhar & Carl Chiarella & Hing Hung & Wolfgang Runggaldier, 2004. "The Volatility of the Instantaneous Spot Interest Rate Implied by Arbitrage Pricing - A Dynamic Bayesian Approach," Finance 0409002, University Library of Munich, Germany.
    3. Eckhard Platen & Wolfgang Runggaldier, 2004. "A Benchmark Approach to Filtering in Finance," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 79-105, March.
    4. Gombani, Andrea & Jaschke, Stefan R. & Runggaldier, Wolfgang J., 2005. "A filtered no arbitrage model for term structures from noisy data," Stochastic Processes and their Applications, Elsevier, vol. 115(3), pages 381-400, March.
    5. Ram Bhar & Carl Chiarella & Wolfgang Runggaldier, 2001. "Estimation in Models of the Instantaneous Short Term Interest Rate By Use of a Dynamic Bayesian Algorithm," Research Paper Series 68, Quantitative Finance Research Centre, University of Technology, Sydney.

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