Parameter uncertainty in Kalman filter estimation of the CIR term structure model

DSpace/Manakin Repository

Show simple item record

dc.contributor.author O'Sullivan, Conall
dc.date.accessioned 2009-06-16T15:31:45Z
dc.date.available 2009-06-16T15:31:45Z
dc.date.copyright 2007, Centre for Financial Markets en
dc.date.issued 2007
dc.identifier.uri http://hdl.handle.net/10197/1193
dc.description.abstract The Cox, Ingersoll and Ross (1985) term structure model describes the stochastic evolution of government bond yield curves over time using a square root Orstein-Uhlenbeck diffusion process, whilst imposing cross-sectional no-arbitrage restrictions between yields of different maturities. A Kalman filter approach can be used to estimate the parameters of the CIR model from panel data consisting of a time series of bonds of different maturities. The parameters are estimated by optimising a quasi log-likelihood function that results from the prediction error decomposition of the Kalman filter. The quasi log-likelihood function is usually optimised with a deterministic gradient based optimisation technique such as a quadratic hill climbing optimiser. This paper uses an evolutionary optimiser known as differential evolution (DE) to optimise over the parameter space. The DE optimiser is more likely to find the global maximum than a deterministic optimiser in the presence of a non-convex objective function which may be the case in multifactor term structure models with non-negativity constraints and parameter constraints. The method is applied to estimate parameters from a one and two-factor Cox, Ingersoll and Ross (1985) model. It is shown that in the two factor model the problem of local maxima arises whereby a number of different parameter vectors perform equally well in the estimation procedure. Fixed income derivative prices are particular sensitive to term structure parameters such as the volatility, the rate of mean reversion, and the market price of risk of each factor. The effect of different optimal parameter vectors on fixed income derivatives is examined and is found to be significant. en
dc.format.extent 447351 bytes
dc.format.mimetype application/pdf
dc.language.iso en en
dc.publisher University College Dublin. School of Business. Centre for Financial Markets en
dc.relation.ispartofseries Centre for Financial Markets working paper series en
dc.relation.ispartofseries WP-07-18 en
dc.subject.lcsh Bond funds--Econometric models en
dc.subject.lcsh Kalman filtering en
dc.subject.lcsh Parameter estimation en
dc.title Parameter uncertainty in Kalman filter estimation of the CIR term structure model en
dc.type Working Paper en
dc.internal.availability Full text available en
dc.internal.webversions Publisher's version en
dc.internal.webversions http://www.ucd.ie/bankingfinance/docs/wp/WP-07-18.pdf en
dc.status Not peer reviewed en
dc.neeo.contributor O'Sullivan|Conall|aut|


Files in this item

This item appears in the following Collection(s)

Show simple item record

This item is available under the Attribution-NonCommercial-NoDerivs 3.0 Ireland. No item may be reproduced for commercial purposes. For other possible restrictions on use please refer to the publisher's URL where this is made available, or to notes contained in the item itself. Other terms may apply.

If you are a publisher or author and have copyright concerns for any item, please email research.repository@ucd.ie and the item will be withdrawn immediately. The author or person responsible for depositing the article will be contacted within one business day.

Search Research Repository


Advanced Search

Browse