Estimating multivariate exponential-affine term structure models from coupon bond prices using nonlinear filtrering

Mikkel Baadsgaard, Jan Nygaard Nielsen, Henrik Madsen, (hm@imm.dtu.dk)

For a copy of this paper, either Abstract:

An econometric analysis of continuous-time models of the term structure of interest rates is presented. A panel of coupon bond prices with different maturities is used to estimate the embedded parameters of a continuous-discrete state space model of unobserved state variables: the spot interest rate, the central tendency and stochastic volatility. Emphasis is placed on the particular class of exponential-affine term structure models that permits solving the bond pricing PDE in terms of a system of ODEs. It is assumed that coupon bond prices are contaminated by additive white noise, where the stochastic noise term should account for model errors. A nonlinear filtering method is used to compute estimates of the state variables, and the model parameters are estimated by a quasi-maximum likelihood method provided that some assumptions are imposed on the model residuals. Both Monte Carlo simulation results and empirical results based on the Danish bond market are presented.

KEYWORDS:
Nonlinear filtering, quasi maximum likelihood estimation, state space models, stochastic differential equations, stochastic volatility, term structure modelling

IMM technical report 09/2000


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