New Bond Princing Models with Applications to Japanese Data

Takeaki Kariya and Hiroshi Tsuda

Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: In this paper, first the cross-sectional bond pricing model for individual bonds Kariya (1993) proposed by formulating stochastic discount function (term structure) is applied to Japanese T-bond data and it is observed that the model performs very well as it stands. Second, we generalize the cross-sectional model into two types of time-dependent Markov models (TDM's ) with the term structure of discount rates of each bond at \plain\f2\fs20\i t \plain\f2\fs20 being dependent on the one at \plain\f2\fs20\i t-\plain\f2\fs20 1, and apply it to the same data to find significantly improved results over those of the cross-sectional model. In fact, almost all the differences between actual prices and model values are less than 0.5 yen in each month over 12 years. On the basis of our analysis, we propose a TDM as a model for T-bond trading.

Date: 1993-12
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a283

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