Nonparametric Estimation of Convergence of Interest Rates: Effects on Bond Pricing

Teresa Corzo and Javier Gómez Biscarri

No 03/04, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: We present and estimate a model of short term interest rate dynamics where we incorporate the convergent behavior of interest rates implied by the transition to EMU. We apply this model to data of two EMU countries -Spain and Italy- and compare the performance, in terms of accuracy of bond pricing, of this two-factor convergence model with alternative specifications. Nonparametric techniques are used for the estimation of the processes. The two-factor model which accounts for the convergence with Europe of the domestic economies, obtains better results than alternative models mainly for short-term assets. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives.

JEL-codes: C14 E43 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-03-01
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Published, Spanish Economic Review, 2005, vol. 7(3): pp. 167-190

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Journal Article: Nonparametric estimation of convergence of interest rates: Effects on bond pricing (2005)
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