Observational Equivalence of Discrete String Models and Market Models

F.L.J. Kerkhof, A. Pelsser

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Abstract

In this paper we show that, contrary to the claim made in Longsta, Santa-Clara, and Schwartz (2001a) and Longsta, Santa-Clara, and Schwartz (2001b), discrete string models are not more parsimonious than market models.In fact, they are found to be observationally equivalent.We derive that, for the estimation of both a K-factor discrete string model and a K-factor Libor market model for N forward rates the number of parameters that needs to be estimated equals NK .K (K .1) /2 and not K (K +1)/2 and NK, respectively.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages10
Volume2002-28
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-28

Keywords

  • string model
  • market model

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