Abstract

http://ssrn.com/abstract=286258
 
 

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Observational Equivalence of Discrete String Models and Market Models


Jeroen Kerkhof


Lehman Brothers International, Europe

Antoon Pelsser


Maastricht University; Netspar

October 5, 2001


Abstract:     
In this paper we show that contrary to the claim made in Longstaff, Santa-Clara, and Schwartz (2000a) and Longstaff, Santa-Clara, and Schwartz (2000b) discrete string models are not more parsimonious than market models. In fact, they are found to be observationally equivalent. We derived that for the estimation of both a K-factor discrete string model and a K-factor Libor market model for N forward rates the number of parameters needed to be estimated equals NK-K(K-1)/2 and not K(K+1)/2 and NK, respectively. We do believe that from an economic point of view the interpretation of the decomposition of the covariance (or correlation) matrix in the discrete string model deserves preference over the market model.

Number of Pages in PDF File: 9

Keywords: String model, market model

JEL Classification: G12

working papers series


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Date posted: October 4, 2001  

Suggested Citation

Kerkhof, Jeroen and Pelsser, Antoon, Observational Equivalence of Discrete String Models and Market Models (October 5, 2001). Available at SSRN: http://ssrn.com/abstract=286258 or http://dx.doi.org/10.2139/ssrn.286258

Contact Information

F.L. Jeroen Kerkhof (Contact Author)
Lehman Brothers International, Europe ( email )
25 Bank Street
30th Floor
London E14 5LE
United Kingdom
Antoon A. J. Pelsser
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200 MD
Netherlands
HOME PAGE: http://https://sites.google.com/site/apelsseraca/
Netspar ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Feedback to SSRN


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