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A semiparametric single-factor model of the term structure

Kristensen, Dennis (2004) A semiparametric single-factor model of the term structure. Discussion paper, 501. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

We propose a semiparametric single-factor diffusion model for the term structure of interest rate. The This model is highly flexible and encompasses most parametric single-factor models proposed in the literature. We fit the semiparametric model to a proxy of the Eurodollar short term interst rate and compare it with the most flexible parametric model found in the literature: First directly, by testing the fully parametric model against the semiparametric one. Secondly, we look at how much the bond prices predicted by the competing models differ; this yields an alternative measure of the performance of the models. The fitted semiparametric model picks up nonlinearities which the fully parameteric model cannot capture. This leads to a rejection of the parametric model in favour of the semiparametric model in the direct comparison of the two fitted models. Moreover, the calculated bond prices implied by the two competing models are shown to be significantly different.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2004 The Author
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 501
Date Deposited: 06 Aug 2009 09:03
URL: http://eprints.lse.ac.uk/24741/

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