Genetic Algorithm Estimation of Interest Rate Term Structure

35 Pages Posted: 13 Dec 2006

See all articles by Ricardo Gimeno

Ricardo Gimeno

Banco de España

Juan Miguel Nave

University of Castilla-La Mancha; Universidad CEU Cardenal Herrera

Date Written: December 11, 2006

Abstract

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.

Keywords: forward and spot interest rates, Nelson and Siegel model, non-linear optimization, numerical methods, Svensson model, yield curve estimation

JEL Classification: G12, C51, C63

Suggested Citation

Gimeno, Ricardo and Nave, Juan Miguel, Genetic Algorithm Estimation of Interest Rate Term Structure (December 11, 2006). Banco de Espana Research Paper No. WP-0634, Available at SSRN: https://ssrn.com/abstract=950982 or http://dx.doi.org/10.2139/ssrn.950982

Ricardo Gimeno (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Juan Miguel Nave

University of Castilla-La Mancha ( email )

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

Universidad CEU Cardenal Herrera

Comissari, 1
Elche, Alicante
Spain

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