Prediction of interest rate using CKLS model with stochastic parameters
The Chan, Karolyi, Longstaff and Sanders (CKLS) model is a popular onefactor 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 jth 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 fourdimensional conditional distribution which is derived from a [4(m+1)+1]dimensional powernormal 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 fourdimensional conditional distribution, we also find a prediction interval for the future interest rate r{sub j+n+d} at the next dth (d≥2) time point. The prediction intervals based on the CKLS model with stochastic parameters are found to have better ability ofmore »
 Authors:

^{[1]};
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 Faculty of Computing and Informatics, Multimedia University, Jalan Multimedia, 63100 Cyberjaya, Selangor (Malaysia)
 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), 1719 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; FOURDIMENSIONAL CALCULATIONS; INTEREST RATE; MATHEMATICAL MODELS; STOCHASTIC PROCESSES; VARIATIONS; VECTORS