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Adaptive Interest Rate Modelling

Mengmeng Guo () and Wolfgang Karl Härdle
Authors registered in the RePEc Author Service: Wolfgang Karl Härdle ()

No SFB649DP2010-029, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: A good description of the dynamics of interest rates is crucial to price derivatives and to hedge corresponding risk. Interest rate modelling in an unstable macroeconomic context motivates one factor models with time varying parameters. In this paper, the local parameter approach is introduced to adaptively estimate interest rate models. This method can be generally used in time varying coefficient parametric models. It is used not only to detect the jumps and structural breaks, but also to choose the largest time homogeneous interval for each time point, such that in this interval, the coeffcients are statistically constant. We use this adaptive approach and apply it in simulations and real data. Using the three month treasure bill rate as a proxy of the short rate, we nd that our method can detect both structural changes and stable intervals for homogeneous modelling of the interest rate process. In more unstable macroeconomy periods, the time homogeneous interval can not last long. Furthermore, our approach performs well in long horizon forecasting.

Keywords: CIR model; Interest rate; Local parametric approach; Time homogeneous interval; Adaptive statistical techniques (search for similar items in EconPapers)
JEL-codes: E44 G12 G32 N22 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-05
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed

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Journal Article: Adaptive Interest Rate Modelling (2017) Downloads
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