Ab initio yield curve dynamics

DOI10.1016/J.PHYSLETA.2005.06.079MaRDI QIDQ936899zbMATH OpenOpenAlexWikidataFDO

Authors Raymond J. Hawkins, B. Roy Frieden, Joseph L. D'Anna

Publication date 20 August 2008

Published in Physics Letters. A (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/physics/0507098

zbMATH Keywords

term structureyield curvedynamicsFokker-PlanckGalerkinproper orthogonal decompositionFisher informationinterest ratebondprincipal-component analysisKarhunen-Lòeve

Mathematics Subject Classification ID

Information theory (general) (94A15) Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We derive an equation of motion for interest-rate yield curves by applying a minimum Fisher information variational approach to the implied probability density. By construction, solutions to the equation of motion recover observed bond prices. More significantly, the form of the resulting equation explains the success of the Nelson Siegel approach to fitting static yield curves and the empirically observed modal structure of yield curves. A practical numerical implementation of this equation of motion is found by using the Karhunen-Loeve expansion and Galerkin's method to formulate a reduced-order model of yield curve dynamics.

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Cited in

(7)

• A numerical approach to obtain the yield curves with different risk-neutral drifts
• scientific article; zbMATH DE number 6612400 (Why is no real title available?)
• Asymmetric information and quantization in financial economics
• Yield curve smoothing and residual variance of fixed income positions
• Decreasing Yield Curves in a Model with an Unknown Constant Growth Rate
• Consistent recalibration of yield curve models
• Global yield curve dynamics and interactions: a dynamic Nelson-Siegel approach

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