Kalman Filtering of Generalized Vasicek Term Structure Models

Posted: 30 Dec 1998

See all articles by K. Ben Nowman

K. Ben Nowman

City University London

Simon H. Babbs

The Options Clearing Corporation

Abstract

We present a subclass of Langetieg's (1980) linear Gaussian models of the term structure. The bond price is derived in terms of a finite set of state variables with correlated innovations. The subclass contains a reformulation of the double decay model of Beaglehole and Tenney (1991), enabling us to clarify interpretation of their parameters. We apply Kalman filtering to a state space formulation of the model allowing measurement errors in the data. One, two and three factor models are estimated on US data over 1987-1996 and the results indicate the subclass of models can fit the US term structure.

JEL Classification: E43, G12

Suggested Citation

Nowman, K. Ben and Babbs, Simon H., Kalman Filtering of Generalized Vasicek Term Structure Models. Available at SSRN: https://ssrn.com/abstract=142134

K. Ben Nowman (Contact Author)

City University London ( email )

Frobisher Crescent
Barbican Centre Centre for Math Trading & Finance
London EC2Y 8HB
United Kingdom
44 171 477 8698 (Phone)

Simon H. Babbs

The Options Clearing Corporation ( email )

1 N. Wacker Drive
Chicago, IL 60606
United States
312 322 6288 (Phone)
312 322 4442 (Fax)

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