Nonlinear Kalman Filtering in Affine Term Structure Models

Peter Christoffersen, Christian Dorion, Kris Jacobs and Lotfi Karoui

Cahiers de recherche from CIRPEE

Abstract: The extended Kalman filter, which linearizes the relationship between security prices and state variables, is widely used in fixed income applications. We investigate if the unscented Kalman filter should be used to capture nonlinearities, and compare the performance of the Kalman filter to that of the particle filter. We analyze the cross section of swap rates, which are mildly nonlinear in the states, and cap prices, which are highly nonlinear. When caps are used to filter the states, the unscented Kalman filter significantly outperforms its extended counterpart. The unscented Kalman filter also performs well when compared to the much more computationally intensive particle filter. These findings suggest that the unscented Kalman filter may prove to be a good approach for variety of problems in fixed income pricing.

Keywords: Kalman filtering; nonlinearity; term structure models; swaps; caps (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (36)

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Related works:
Journal Article: Nonlinear Kalman Filtering in Affine Term Structure Models (2014)
Working Paper: Nonlinear Kalman Filtering in Affine Term Structure Models (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1404

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