Modelling the term structure of interest rates: An efficient nonparametric approach

Lourdes Gómez-Valle and Marti­nez-Rodri­guez, Julia

Journal of Banking & Finance, 2008, vol. 32, issue 4, 614-623

Abstract: We propose a new approach for estimating the coefficients of the term structure equation by means of the volatility of the interest rates and the slope of the yield curve. One advantage of this approach consists in the fact that the drift and the market price of risk are jointly estimated and need not be individually specified. We then generate trajectories in a test problem to investigate the finite properties of this approach. Our simulation results show that this new approach outperforms the classic nonparametric models in the literature. Finally, an application to USA Treasury Bill data is also illustrated.

Date: 2008
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