Calibration of short rate term structure models from bid–ask coupon bond prices

Erika Gomes-Gonçalves, Henryk Gzyl () and Silvia Mayoral

Physica A: Statistical Mechanics and its Applications, 2018, vol. 492, issue C, 1456-1472

Abstract: In this work we use the method of maximum entropy in the mean to provide a model free, non-parametric methodology that uses only market data to provide the prices of the zero coupon bonds, and then, a term structure of the short rates. The data used consists of the prices of the bid–ask ranges of a few coupon bonds quoted in the market. The prices of the zero coupon bonds obtained in the first stage, are then used as input to solve a recursive set of equations to determine a binomial recombinant model of the short term structure of the interest rates.

Keywords: Zero coupon bond prices; Short rate model calibration; Maximum entropy in the mean; Interest rate swaps (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:492:y:2018:i:c:p:1456-1472

DOI: 10.1016/j.physa.2017.11.073

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