Abstract
Exponential-polynomial families like the Nelson-Siegel or Svensson family are widely used to estimate the current forward rate curve. We investigate whether these methods go well with inter-temporal modelling. We characterize the consistent Ito processes which have the property to provide an arbitrage free interest rate model when representing the parameters of some bounded exponential-polynomial type function. This includes in particular diffusion processes. We show that there is a strong limitation on their choice. Bounded exponential-polynomial families should rather not be used for modelling the term structure of interest rates.
Full Text
Submitted Version (
Free)
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call