Nonparametric estimation of scalar diffusion models of interest rates using asymmetric kernels |
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Authors: | Nikolay Gospodinov Masayuki Hirukawa |
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Institution: | 1. Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada H3G 1M8;2. Faculty of Economics, Setsunan University, 17-8 Ikeda Nakamachi, Neyagawa, Osaka, 572-8508, Japan |
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Abstract: | This paper proposes an asymmetric kernel-based method for nonparametric estimation of scalar diffusion models of spot interest rates. We derive the asymptotic theory for the asymmetric kernel estimators of the drift and diffusion functions for general and positive recurrent processes and illustrate the advantages of the Gamma kernel for bias correction and efficiency gains. The finite-sample properties and the practical relevance of the proposed nonparametric estimators for bond and option pricing are evaluated using actual and simulated data for U.S. interest rates. |
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