Comparative Analysis of the Stochastic and Parsimonious Interest Rates Models on Croatian Government Market

Authors: Zdravka Aljinović, Branka Marasović, Blanka Škrabić

Abstract:

The paper provides a discussion of the most relevant aspects of yield curve modeling. Two classes of models are considered: stochastic and parsimonious function based, through the approaches developed by Vasicek (1977) and Nelson and Siegel (1987). Yield curve estimates for Croatia are presented and their dynamics analyzed and finally, a comparative analysis of models is conducted.

Keywords: the term structure of interest rates, Vasicek model, Nelson-Siegel model, Croatian Government market.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1331331

References:

[1] Z. Aljinović, "Diffusion processes in modelling the term structure of interest rates", in: Proceedings of the 7th International Conference on Operational Research KOI'98 (I. Aganović, T. Hunjak, R. Scitovski, Eds.), Croatian OR Society, Osijek, 1999, 53-60.
[2] Z. Aljinović, S. Jovanović, "An application of the Cox, Ingersoll, Ross model to the Croatian Government securities market", in: Proceedings of the 7th International Conference on Operational Research KOI'98 (I. Aganović, T. Hunjak, R. Scitovski, Eds.), Croatian OR Society, Osijek, 1999, 75-82
[3] Z. Aljinović, B. ┼áego, "How to evaluate the yield curve in transition economy", in: Proceedings of the 5th International Conference "Enterprise in Transition", Faculty of Economics Split, Split, 2003, 262- 264 (extended abstract), full text on CD-ROM, 1152-1165
[4] C.R. Nelson, The Term Structure of Interest Rates, New York, Basic Books, 1972
[5] C. R. Nelson, A. F. Siegel, "Parsimonious modeling of yield curves", Journal of Business, 60, 474-489, 1987
[6] O.Vasicek, "An equilibrium characterization of the term structure", Journal of Financial Economics, 5, 177-188, 1977
[7] P. Venkataraman, Applied Optimization With MATLAB Programing, John Wiley & Sons, New York, 2002
[8] J.H. Wood, "Are Yield Curves Normally Upward Sloping? The Term Structure of Interest Rates, 1862-1982", Federal Reserve Bank of Chicago Economic Perspectives, Vol.7, July/August, 17-23, 1983.