Genetic algorithm estimation of interest rate term structure

Ricardo Gimeno and Juan Nave ()
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Juan Nave: Universidad CEU Cardenal Herrera

No 634, Working Papers from Banco de España

Abstract: The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms - as proposed by Nelson and Siegel (1987) and Svensson (1994) - is the most popular technique. This method is based on bond yields to maturity and the high degree of non linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restrictions.

Keywords: forward and spot interest rates; Nelson and Siegel model; non-linear optimization; numerical methods; Svensson model; yield curve estimation (search for similar items in EconPapers)
JEL-codes: C51 C63 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2006-12
New Economics Papers: this item is included in nep-cmp, nep-ecm, nep-ict and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0634

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