A Methodology to Estimate the Interest Rates Yield Curve in Illiquid Market: The Tunisian Case

18 Pages Posted: 15 May 2013 Last revised: 24 May 2013

See all articles by Fatma Chakroun

Fatma Chakroun

University of Sfax-Faculty of Economics and Management (FSEGS)

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Date Written: May 1, 2013

Abstract

The aim of this paper is to develop a methodology to estimate the interest rates yield curve and its dynamics in the Tunisian bond market, which is considered as an illiquid market with a low trading volume. To achieve this, first, we apply the cubic spline interpolation method to deal with the missing observation problem. Second, we focus on the work of Vasicek (1977) and Cox-Ingersoll and Ross (CIR) (1985), we estimate each model and discuss its performance in predicting the dynamics of the interest rates yield curve using Ordinary Least Squares and Maximum Likelihood Estimation (OLS and MLE) methods. The data sample consists of Treasury bond prices for the period from 14 July 2004 to 10 September 2012 collected from over the counter market. This assessment is done by Matlab software using the specified algorithms. The results suggest that the cubic spline method is accurate for estimation the average yield curve of interest rates. Then, the estimation of Vasicek (1977) and CIR (1985) models generate an upward sloping yield curves and seems suitable to replicate the stylized facts of the interest rates in the Tunisian bond market. Finally, the forecasting of the yield curve predicts an economic growth in the future characterized by a higher inflation.

Keywords: Illiquid Market, Yield Curve of Interest Rates, Cubic Spline, Vasicek (1977) model, CIR (1985) model, OLS, MLE

Suggested Citation

Chakroun, Fatma and Abid, Fathi, A Methodology to Estimate the Interest Rates Yield Curve in Illiquid Market: The Tunisian Case (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2264913 or http://dx.doi.org/10.2139/ssrn.2264913

Fatma Chakroun (Contact Author)

University of Sfax-Faculty of Economics and Management (FSEGS) ( email )

Airport Road Km 4
Sfax, 3081
Tunisia

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

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