Nonparametric Pricing of Interest Rate Derivative Securities

45 Pages Posted: 20 Jul 2000 Last revised: 11 Aug 2022

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics

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Date Written: November 1995

Abstract

We propose a nonparametric estimation procedure for continuous- time stochastic models. Because prices of derivative securities depend crucially on the form of the instantaneous volatility of the underlying process, we leave the volatility function unrestricted and estimate it nonparametrically. Only discrete data are used but the estimation procedure still does not rely on replacing the continuous- time model by some discrete approximation. Instead the drift and volatility functions are forced to match the densities of the process. We estimate the stochastic differential equation followed by the short term interest rate and compute nonparametric prices for bonds and bond options.

Suggested Citation

Ait-Sahalia, Yacine, Nonparametric Pricing of Interest Rate Derivative Securities (November 1995). NBER Working Paper No. w5345, Available at SSRN: https://ssrn.com/abstract=225409

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

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