Improving the Quality of the Input in the Term Structure Consistent Models

Javier Giner () and Sandra Morini ()
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Javier Giner: University of La Laguna, Tenerife
Sandra Morini: University of La Laguna, Tenerife

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In finance, getting an accurate estimation of the term structure of interest rates is essential because this information is often used as input by other pricing financial models. In this paper, we point out the importance of selecting a suitable estimation of the term structure of interest rates. To show this fact, we use the Spanish Bond Market to estimate the initial interest rate and forward curves for one day, by using both McCulloch (1975) cubic polynomial splines, and Legendre's polynomials (Morini, 1998). We use these curves as input for pricing pure discount bonds with the Ho and Lee (1986) and Hull and White (1990) models. Then, we find the important result that using an inadequate interest rate curve affects dramatically the behaviour of the dynamic term structure models and, consequently, the estimation of the asset pricing models

Keywords: Term structure of interest rates; dynamic consistent models (search for similar items in EconPapers)
JEL-codes: E43 (search for similar items in EconPapers)
Date: 2001-09-01
New Economics Papers: this item is included in nep-fmk
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