Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs

DOI10.1080/03610918.2020.1721540MaRDI QIDQ5867418zbMATH OpenOpenAlexFDO

Authors Michele Leonardo Bianchi

Publication date 14 September 2022

Published in Communications in Statistics. Simulation and Computation (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1805.09996

zbMATH Keywords

bond pricingCox-Ingersoll-Ross processesGaussian Ornstein-Uhlenbeck processesKalman filtermaximum likelihood estimationnonlinear optimization

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: In this paper, we empirically study models for pricing Italian sovereign bonds under a reduced form framework, by assuming different dynamics for the short-rate process. We analyze classical Cox-Ingersoll-Ross and Vasicek multi-factor models, with a focus on optimization algorithms applied in the calibration exercise. The Kalman filter algorithm together with a maximum likelihood estimation method are considered to fit the Italian term-structure over a 12-year horizon, including the global financial crisis and the euro area sovereign debt crisis. Analytic formulas for the gradient vector and the Hessian matrix of the likelihood function are provided.

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Cites work

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• scientific article; zbMATH DE number 5619427 (Why is no real title available?)
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Uses Software

• System Identification Toolbox

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