Gaussian estimation and forecasting of the U.K. yield curve with multi-factor continuous-time models

Tunaru, Diana E. 2017. Gaussian estimation and forecasting of the U.K. yield curve with multi-factor continuous-time models. International Review of Financial Analysis. 52, pp. 119-129. doi:10.1016/j.irfa.2017.05.003

TitleGaussian estimation and forecasting of the U.K. yield curve with multi-factor continuous-time models
AuthorsTunaru, Diana E.
Abstract

In this paper we will estimate the term structure of daily U.K. interest rates using a range of more flexible continuous-time models. A multivariate framework is employed for the dynamic estimation and forecasting of four classic models over the eventful period of 2000-2013. The extensions are applied in two stages to four- and five-factor formulations, allowing us to assess the potential benefit of gradually increasing the model-flexibility. The Gaussian estimation methods for dynamic continuous-time models yield insightful comparative results concerning the two different segments of the yield curve, short- and long-term, respectively. In terms of in-sample performance the newly extended multi-factor general model is superior to all other restricted models. When compared to benchmark discrete-time models, the out-of-sample performance of the extended continuous-time models seems to be consistently superior with regards to the short-term segment of the yield curve.

Keywordscontinuous-time models, forecasting, Gaussian estimation, multi-factor diffusion models with feedbacks, term structure of interest rates
JournalInternational Review of Financial Analysis
Journal citation52, pp. 119-129
ISSN1057-5219
Year2017
PublisherElsevier
Accepted author manuscriptIRFAGaussian_UK.pdf
Digital Object Identifier (DOI)doi:10.1016/j.irfa.2017.05.003
Publication dates
Published online24 May 2017
LicenseCC BY-NC-ND 4.0

Related outputs

Multi-Factor Dynamic Modelling and Forecasting of Interest Rates and Equity Markets
Tunaru, Diana E. 2017. Multi-Factor Dynamic Modelling and Forecasting of Interest Rates and Equity Markets. PhD thesis University of Westminster Accounting, Finance and Governance

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