Nonparametric estimation of scalar diffusion models of interest rates using asymmetric kernels

Nikolay Gospodinov and Masayuki Hirukawa

Journal of Empirical Finance, 2012, vol. 19, issue 4, 595-609

Abstract: This paper proposes an asymmetric kernel-based method for nonparametric estimation of scalar diffusion models of spot interest rates. We derive the asymptotic theory for the asymmetric kernel estimators of the drift and diffusion functions for general and positive recurrent processes and illustrate the advantages of the Gamma kernel for bias correction and efficiency gains. The finite-sample properties and the practical relevance of the proposed nonparametric estimators for bond and option pricing are evaluated using actual and simulated data for U.S. interest rates.

Keywords: Nonparametric regression; Gamma kernel; Diffusion estimation; Spot interest rate; Derivative pricing (search for similar items in EconPapers)
JEL-codes: C13 C14 C22 E43 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:4:p:595-609

DOI: 10.1016/j.jempfin.2012.04.001

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