Consistent Term-Structure Parametrizations

Damir Filipović ()
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Damir Filipović: University of Vienna, and Vienna University of Economics and Business

Chapter Chapter 9 in Term-Structure Models, 2009, pp 123-141 from Springer

Abstract: Abstract Practitioners and academics alike have a vital interest in parameterized term-structure models. In this chapter, we take up a point left open at the end of Chap. 3, and exploit whether parameterized curve families φ(⋅,z), used for estimating the forward curve, go well with arbitrage-free interest rate models. According to Table 3.4, taken from the BIS document (Technical Documentation, Bank for International Settlements, Basle, March 1999), there is a rich source of cross-sectional data, that is, daily estimations of the parameter z, for the Nelson–Siegel and Svensson families. This suggests that calibrating a diffusion process Z for the parameter z would lead to an accurate factor model for the forward curve. Conditions for the absence of arbitrage can be formulated in terms of the drift and diffusion of Z and derivatives of φ. These conditions turn out to be surprisingly restrictive in some cases.

Keywords: Calendar Time; Bond Price; Consistency Equation; Linear Growth Condition; Polynomial Family (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-540-68015-4_9

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DOI: 10.1007/978-3-540-68015-4_9

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