Estimation of a Nonparametric model for Bond Prices from Cross-section and Time series Information

44 Pages Posted: 1 Mar 2019

See all articles by Bonsoo Koo

Bonsoo Koo

Monash Business School

Davide La Vecchia

University of Geneva - Geneva School of Economics and Management - Research Center for Statistics

Oliver B. Linton

University of Cambridge

Date Written: February 25, 2019

Abstract

We develop estimation methodology for an additive nonparametric panel model that is suitable for capturing the pricing of coupon-paying government bonds followed over many time periods. We use our model to estimate the discount function and yield curve of nominally riskless government bonds. The novelty of our approach is the combination of two different techniques: cross-sectional nonparametric methods and kernel estimation for time varying dynamics in the time series context. The resulting estimator is used for predicting individual bond prices given the full schedule of their future payments. In addition, it is able to capture the yield curve shapes and dynamics commonly observed in the fixed income markets. We establish the consistency, the rate of convergence, and the asymptotic normality of the proposed estimator. A Monte Carlo exercise illustrates the good performance of the method under different scenarios. We apply our methodology to the daily CRSP bond market dataset, and compare ours with the popular Diebold and Li (2006) method.

Keywords: nonparametric inference, panel data, time varying, yield curve dynamics

JEL Classification: C13, C14, C22, G12

Suggested Citation

Koo, Bonsoo and La Vecchia, Davide and Linton, Oliver B., Estimation of a Nonparametric model for Bond Prices from Cross-section and Time series Information (February 25, 2019). Available at SSRN: https://ssrn.com/abstract=3341344 or http://dx.doi.org/10.2139/ssrn.3341344

Bonsoo Koo (Contact Author)

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia
+61 3 9905 0547 (Phone)
+61 3 9905 5474 (Fax)

Davide La Vecchia

University of Geneva - Geneva School of Economics and Management - Research Center for Statistics ( email )

Bld Pont d'Arve 40
Genève, CH - 1205
Switzerland

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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