Nonparametric Estimation of Convergence of Interest Rates
Author | : Teresa Corzo |
Publisher | : |
Total Pages | : 43 |
Release | : 2002 |
ISBN-10 | : OCLC:1290401499 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Nonparametric Estimation of Convergence of Interest Rates written by Teresa Corzo and published by . This book was released on 2002 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present and estimate, using nonparametric regression techniques, a model of short term interest rate dynamics and use the estimation to value bonds. We study the case of two European countries - Spain and Italy - that belong to EMU, and compare the resulting bond prices of a one factor model with that of a two factor, the second factor being a stochastic mean. The pricing errors for both models are 34% smaller than those reported on the parametric literature. Furthermore, the two factor model, which takes into account the convergence with Europe of the domestic economies, obtains better results than the one factor model. Our findings give strong support to the importance of a correct specification of the volatility of interest rates.