skip to main content

Title: Prediction of interest rate using CKLS model with stochastic parameters

The Chan, Karolyi, Longstaff and Sanders (CKLS) model is a popular one-factor model for describing the spot interest rates. In this paper, the four parameters in the CKLS model are regarded as stochastic. The parameter vector φ{sup (j)} of four parameters at the (J+n)-th time point is estimated by the j-th window which is defined as the set consisting of the observed interest rates at the j′-th time point where j≤j′≤j+n. To model the variation of φ{sup (j)}, we assume that φ{sup (j)} depends on φ{sup (j−m)}, φ{sup (j−m+1)},…, φ{sup (j−1)} and the interest rate r{sub j+n} at the (j+n)-th time point via a four-dimensional conditional distribution which is derived from a [4(m+1)+1]-dimensional power-normal distribution. Treating the (j+n)-th time point as the present time point, we find a prediction interval for the future value r{sub j+n+1} of the interest rate at the next time point when the value r{sub j+n} of the interest rate is given. From the above four-dimensional conditional distribution, we also find a prediction interval for the future interest rate r{sub j+n+d} at the next d-th (d≥2) time point. The prediction intervals based on the CKLS model with stochastic parameters are found to have better ability ofmore » covering the observed future interest rates when compared with those based on the model with fixed parameters.« less
Authors:
 [1] ;  [2]
  1. Faculty of Computing and Informatics, Multimedia University, Jalan Multimedia, 63100 Cyberjaya, Selangor (Malaysia)
  2. Sunway University Business School, No. 5, Jalan Universiti, Bandar Sunway, 47500 Subang Jaya, Selangor (Malaysia)
Publication Date:
OSTI Identifier:
22311273
Resource Type:
Journal Article
Resource Relation:
Journal Name: AIP Conference Proceedings; Journal Volume: 1602; Journal Issue: 1; Conference: 3. international conference on mathematical sciences, Kuala Lumpur (Malaysia), 17-19 Dec 2013; Other Information: (c) 2014 AIP Publishing LLC; Country of input: International Atomic Energy Agency (IAEA)
Country of Publication:
United States
Language:
English
Subject:
97 MATHEMATICAL METHODS AND COMPUTING; COMPARATIVE EVALUATIONS; ECONOMICS; FORECASTING; FOUR-DIMENSIONAL CALCULATIONS; INTEREST RATE; MATHEMATICAL MODELS; STOCHASTIC PROCESSES; VARIATIONS; VECTORS