IDEAS home Printed from https://ideas.repec.org/a/ids/ijbder/v4y2021i3p236-257.html
   My bibliography  Save this article

Modelling the dynamics of long-term bonds with Kalman filter

Author

Listed:
  • Romeo Mawonike
  • Dennis Ikpe
  • Samuel Asante Gyamerah

Abstract

We construct a time-consistent and arbitrage-free three-factor Vasicek model for long-term bonds. A new methodology based on a stochastic mean reversion rate which captures uncertainty in long-term bond yields is presented. To allow measurement errors to be accounted for in observed yields, the model is expressed in a state space form. Kalman filtering is then applied to filter uncertainty in the observed yields. An appropriate set of transition equations on state variables and measurement equations on observed yields are derived. Using historical market data from the US Treasury daily interest rates (March 2006 to June 2020), Germany Government bond yields (August 2000 to 15 January 2021) and Canada Government bond yields (16 January 2020 to 14 January 2021), parameters of one-, two- and three-factor models are estimated. The results indicate that the constructed Vasicek model can fit the US, Germany and Canada term structure of interest rates.

Suggested Citation

  • Romeo Mawonike & Dennis Ikpe & Samuel Asante Gyamerah, 2021. "Modelling the dynamics of long-term bonds with Kalman filter," International Journal of Bonds and Derivatives, Inderscience Enterprises Ltd, vol. 4(3), pages 236-257.
    • Handle: RePEc:ids:ijbder:v:4:y:2021:i:3:p:236-257
    as

    Download full text from publisher

    File URL: http://www.inderscience.com/link.php?id=116971
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ids:ijbder:v:4:y:2021:i:3:p:236-257. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sarah Parker (email available below). General contact details of provider: http://www.inderscience.com/browse/index.php?journalID=405 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.