IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v16y2016i4p605-624.html
   My bibliography  Save this article

Exploring the total positivity of yields correlations

Author

Listed:
  • A. Goia
  • E. Salinelli

Abstract

We test the plausibility of the total positivity assumption of interest rates changes recently introduced in order to justify the presence of shift, slope and curvature for yield curves. To this aim, we introduce and discuss a test of total positivity of order for covariance and correlation matrices. The explicit expressions of the test statistics are given for Gaussian samples and an extension to a distribution-free framework is made via a bootstrap method. After exploring with simulation the robustness of such tests, we show using real data how it is realistic to assume that correlation matrices of interest rates changes are totally positive of order two. Conclusions on total positivity of order three are more controversial.

Suggested Citation

  • A. Goia & E. Salinelli, 2016. "Exploring the total positivity of yields correlations," Quantitative Finance, Taylor & Francis Journals, vol. 16(4), pages 605-624, April.
    • Handle: RePEc:taf:quantf:v:16:y:2016:i:4:p:605-624
    DOI: 10.1080/14697688.2015.1051097
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/14697688.2015.1051097
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/14697688.2015.1051097?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    References listed on IDEAS

    as
    1. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    4. John Schoenmakers & Brian Coffey, 2003. "Systematic Generation of Parametric Correlation Structures for the LIBOR Market Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(05), pages 507-519.
    5. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Prakash Chakraborty & Kiseop Lee, 2022. "Bond Prices Under Information Asymmetry and a Short Rate with Instantaneous Feedback," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 613-634, June.
    2. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    3. Frank De Jong & Joost Driessen & Antoon Pelsser, 2001. "Libor Market Models versus Swap Market Models for Pricing Interest Rate Derivatives: An Empirical Analysis," Review of Finance, European Finance Association, vol. 5(3), pages 201-237.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. repec:uts:finphd:40 is not listed on IDEAS
    6. Constantin Mellios, 2007. "Interest rate options valuation under incomplete information," Annals of Operations Research, Springer, vol. 151(1), pages 99-117, April.
    7. Moreno, Manuel & Platania, Federico, 2015. "A cyclical square-root model for the term structure of interest rates," European Journal of Operational Research, Elsevier, vol. 241(1), pages 109-121.
    8. Oldrich Alfons Vasicek & Francisco Venegas-Martínez, 2021. "Models of the Term Structure of Interest Rates: Review, Trends, and Perspectives," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(2), pages 1-28, Abril - J.
    9. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    10. Lin, Shih-Kuei & Wang, Shin-Yun & Chen, Carl R. & Xu, Lian-Wen, 2017. "Pricing Range Accrual Interest Rate Swap employing LIBOR market models with jump risks," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 359-373.
    11. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    12. Boero, G. & Torricelli, C., 1996. "A comparative evaluation of alternative models of the term structure of interest rates," European Journal of Operational Research, Elsevier, vol. 93(1), pages 205-223, August.
    13. David Bolder, 2001. "Affine Term-Structure Models: Theory and Implementation," Staff Working Papers 01-15, Bank of Canada.
    14. Cheikh Mbaye & Frédéric Vrins, 2022. "Affine term structure models: A time‐change approach with perfect fit to market curves," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 678-724, April.
    15. Koo, Bonsoo & Linton, Oliver, 2012. "Estimation of semiparametric locally stationary diffusion models," Journal of Econometrics, Elsevier, vol. 170(1), pages 210-233.
    16. repec:wyi:journl:002108 is not listed on IDEAS
    17. Yu, Wei-Choun & Zivot, Eric, 2011. "Forecasting the term structures of Treasury and corporate yields using dynamic Nelson-Siegel models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 579-591.
    18. Hürlimann, Werner, 2010. "Analytical Pricing of the Unit-Linked Endowment with Guarantees and Periodic Premiums," ASTIN Bulletin, Cambridge University Press, vol. 40(2), pages 631-653, November.
    19. Marcello Pericoli, 2014. "Real Term Structure and Inflation Compensation in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 1-42, March.
    20. Lahmiri, Salim, 2016. "Interest rate next-day variation prediction based on hybrid feedforward neural network, particle swarm optimization, and multiresolution techniques," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 444(C), pages 388-396.
    21. Mauricio Contreras G. & Roberto Ortiz H, 2021. "Three little arbitrage theorems," Papers 2104.10187, arXiv.org.
    22. Ji-Xia Wang & Qing-Xian Xiao, 2014. "Local composite quantile regression estimation of time-varying parameter vector for multidimensional time-inhomogeneous diffusion models," Journal of Applied Statistics, Taylor & Francis Journals, vol. 41(11), pages 2437-2449, November.

    More about this item

    Statistics

    Access and download statistics

    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:taf:quantf:v:16:y:2016:i:4:p:605-624. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    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.