Calibration of short rate term structure models from bid-ask coupon bond prices Articles uri icon

publication date

  • February 2018

start page

  • 1456

end page

  • 1472

volume

  • 492

International Standard Serial Number (ISSN)

  • 0378-4371

Electronic International Standard Serial Number (EISSN)

  • 1873-2119

abstract

  • In this work we use the method of maximum entropy in the mean to provide a model free, non-parametric methodology that uses only market data to provide the prices of the zero coupon bonds, and then, a term structure of the short rates. The data used consists of the prices of the bid ask ranges of a few coupon bonds quoted in the market. The prices of the zero coupon bonds obtained in the first stage, are then used as input to solve a recursive set of equations to determine a binomial recombinant model of the short term structure of the interest rates. (C) 2017 Elsevier B.V. All rights reserved.

keywords

  • zero coupon bond prices; short rate model calibration; maximum entropy in the mean; interest rate swaps