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    Short rate forecasting based on the inference from the CIR model for multiple yield curve dynamics

    229460_163531_paperAFEr2.pdf (449.9Kb)
    Access Status
    Open access
    Authors
    Hin, L.
    Dokuchaev, Nikolai
    Date
    2016
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Hin, L. and Dokuchaev, N. 2016. Short rate forecasting based on the inference from the CIR model for multiple yield curve dynamics. Annals of Financial Economics. 11 (1): 1650004.
    Source Title
    Annals of Financial Economics
    DOI
    10.1142/S2010495216500044
    ISSN
    2010-4952
    School
    Department of Mathematics and Statistics
    Remarks

    Electronic version of an article published as Annals of Financial Economics, Vol. 11, No. 01 (2016), doi: 10.1142/S2010495216500044 © copyright World Scientific Publishing Company, http://www.worldscientific.com/worldscinet/afe

    URI
    http://hdl.handle.net/20.500.11937/15379
    Collection
    • Curtin Research Publications
    Abstract

    In this paper, we propose a strategy to extract the information on the market participants’ expectation of the future short rate from the cross-sectional zero coupon bond prices. In line with the current market practice of building different yield curves for different tenors, we construct multiple one-factor short rate processes to pin down the salient features of the yield curve at different tenors. We represent this information in the form of the Cox–Ingersoll–Ross model implied parameters, and show that this information can be used to forecast the future short rate. This approach of representing the information on the market participants’ consensus in the form of implied model parameters and using these implied parameters for forecasting purposes resembles the approach of representing the market expectation of the underlying asset volatility reflected by stock option prices in the form of implied volatility, and using it to forecast the realized volatility. We illustrate the implementation of this method using historical US STRIPS prices and effective Federal Funds rate.

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