Nonparametric estimation of convergence of interest rates: Effects on bond pricing

Teresa Corzo and Javier Gómez Biscarri

Spanish Economic Review, 2005, vol. 7, issue 3, 167-190

Abstract: We present and estimate a model of short term interest rate dynamics where we incorporate the convergent behavior of interest rates implied by the transition to EMU. We apply this model to data of two EMU countries - Spain and Italy - and compare the performance, in terms of accuracy of bond pricing, of this two-factor convergence model with alternative specifications. Nonparametric techniques are used for the estimation of the processes. The two-factor model which accounts for the convergence with Europe of the domestic economies, obtains better results, especially for short-term assets, than alternative models. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Nonparametric estimation; convergence of interest rates; continuous time; bond valuation (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s10108-004-0094-2

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