Exponential-Polynomial Families and the Term Structure of Interest Rates

Exponential-polynomial families like the Nelson-Siegel or Svensson family are widely used to estimate the current forward rate curve. We investigate whether these methods go well with inter-temporal modelling. We characterize the consistent Ito processes which have the property to provide an arbitrage free interest rate model when representing the parameters of some bounded exponential-polynomial type function. This includes in particular diffusion processes. We show that there is a strong limitation on their choice. Bounded exponential-polynomial families should rather not be used for modelling the term structure of interest rates.


Published in:
Bernoulli , 6(6), 1-27
Year:
2000
Publisher:
Bernoulli Society for Mathematical Statistics and Probability
ISSN:
1350-7265
Keywords:
Laboratories:




 Record created 2010-04-25, last modified 2018-03-17

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