TY - JOUR
AU - Ait-Sahalia, Yacine
TI - Nonparametric Pricing of Interest Rate Derivative Securities
JF - National Bureau of Economic Research Working Paper Series
VL - No. 5345
PY - 1995
Y2 - November 1995
DO - 10.3386/w5345
UR - http://www.nber.org/papers/w5345
L1 - http://www.nber.org/papers/w5345.pdf
N1 - Author contact info:
Yacine Aït-Sahalia
Department of Economics
Bendheim Center for Finance
Princeton University
Princeton, NJ 08540
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu
AB - 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.
ER -