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Continuous time and nonparametric modelling of U.S. interest rate models

Nowman, K. Ben and Saltoglu, Burak (2003) Continuous time and nonparametric modelling of U.S. interest rate models. International Review of Financial Analysis, 12 (1). pp. 25-34. ISSN 1057-5219

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Official URL: http://dx.doi.org/10.1016/S1057-5219(02)00123-0

Abstract

In this paper we compare the forecasting performance of different models of interest rates using parametric and nonparametric estimation methods. In particular, we use three popular nonparametric methods, namely, artificial neural networks (ANN), k-nearest neighbour (k-NN), and local linear regression (LL). These are compared with forecasts obtained from two-factor continuous time interest rate models, namely, Chan, Karolyi, Longstaff, and Sanders [CKLS, J. Finance 47 (1992) 1209]; Cos, Ingersoll, and Ross [CIR, Econometrica 53 (1985) 385]; Brennan and Schwartz [BR–SC, J. Financ. Quant. Anal. 15 (1980) 907]; and Vasicek [J. Financ. Econ. 5 (1977) 177]. We find that while the parametric continuous time method, specifically Vasicek, produces the most successful forecasts, the nonparametric k-NN performed well.

Item Type:Article
Uncontrolled Keywords:Interest rates, Forecasting, Nonparametric, Continuous time
Research Community:University of Westminster > Westminster Business School
ID Code:740
Deposited On:21 Sep 2005
Last Modified:13 Oct 2009 16:18

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