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Stability of Models for the Term Structure of Interest Rates with Application to German Market Data

Published online by Cambridge University Press:  10 June 2011

A.J.G. Cairns  and
D.J. Pritchard
A.J.G. Cairns
Affiliation:
Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh EH14 4AS, U.K. E-mail: A.Cairns@ma.hw.ac.uk Internet: www.ma.hw.ac.uk/~andrewc/
D.J. Pritchard
Affiliation:
Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh EH14 4AS, U.K. E-mail: D.J.Pritchard@ma.hw.ac.uk
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Abstract

This paper discusses the use of parametric models for description of the term structure of interest rates and their uses. We extend earlier work of Cairns (1998), Chaplin (1998) and Feldman et al. (1998), by presenting new theoretical results and also by demonstrating that the same model can be applied to countries other than the United Kingdom. First, we prove that the process of fitting a yield curve to price data has a unique optimal solution in both zero-coupon-bond and low-coupon-bond markets. Furthermore, an alternative method of curve fitting to those proposed previously is shown to have a unique solution in all markets.

The restricted-exponential model has previously been applied to U.K. data (Cairns, 1998). Here, we consider its wider application in European bond markets. In particular, we analyse German market data and conclude that the same model applies equally well to both countries.

Keywords

Term StructureMultiple MaximaRestricted-Exponential ModelLikelihood FunctionPosterior DistributionBayesian Estimator
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 7 , Issue 3 , 01 August 2001 , pp. 467 - 507
Copyright
Copyright © Institute and Faculty of Actuaries 2001

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