Genetic Algorithm Estimation of Interest Rate Term Structure
Bank of Spain
Juan Miguel Nave
University of Castilla-La Mancha; Universidad CEU Cardenal Herrera
December 11, 2006
Banco de Espana Research Paper No. WP-0634
The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms - as proposed by Nelson and Siegel (1987) and Svensson (1994) - is the most popular technique. This method is based on bond yields to maturity and the high degree of non linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restrictions.
Number of Pages in PDF File: 35
Keywords: forward and spot interest rates, Nelson and Siegel model, non-linear optimization, numerical methods, Svensson model, yield curve estimation
JEL Classification: G12, C51, C63working papers series
Date posted: December 13, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.453 seconds