TY - JOUR
AU - Lacoste, Vincent
AB - This paper discusses the introduction and the selection of a finite set of state variable in arbitrage‐free models of the term structure of interest rates. We choose a Gaussian setting which offers, as it is well known, tractable computations, hence results easier to understand and interpret. We study the mathematical conditions under which interest rates can be taken as state variables and address the key issues of time homogeneity of the model for a given set of state variables and the role of the current yield curve. Lastly, we provide explicit empirical estimations for four different swap markets (France, Italy, Japan, United Kingdom) and show that the state variables extracted through the use of a Kalman filter approach can be identified with linear combinations of interest rates. Copyright © 2000 John Wiley & Sons, Ltd.
TI - On the role of state variables in interest rates models
JF - Applied Stochastic Models in Business and Industry
DO - 10.1002/1526-4025(200007/09)16:3<197::AID-ASMB414>3.0.CO;2-Q
DA - 2000-07-01
UR - https://www.deepdyve.com/lp/wiley/on-the-role-of-state-variables-in-interest-rates-models-JMH0YqCJv6
SP - 197
EP - 217
VL - 16
IS - 3
DP - DeepDyve
ER -