Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs

Michele Leonardo Bianchi

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arXiv · 1805.09996

Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs

Michele Leonardo Bianchi

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Abstract

In this paper, we empirically study models for pricing Italian sovereign bonds under a reduced form framework, by assuming different dynamics for the short-rate process. We analyze classical Cox-Ingersoll-Ross and Vasicek multi-factor models, with a focus on optimization algorithms applied in the calibration exercise. The Kalman filter algorithm together with a maximum likelihood estimation method are considered to fit the Italian term-structure over a 12-year horizon, including the global financial crisis and the euro area sovereign debt crisis. Analytic formulas for the gradient vector and the Hessian matrix of the likelihood function are provided.

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Michele Leonardo Bianchi. 2018-05-25. Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs. https://arxiv.org/abs/1805.09996

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