Observational Equivalence of Discrete String Models and Market Models

F.L.J. Kerkhof, A. Pelsser

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Market model
Observational equivalence
Discrete model
Factors
LIBOR market model
Forward rates

Keywords

  • string model
  • market model

Cite this

Kerkhof, F. L. J., & Pelsser, A. (2002). Observational Equivalence of Discrete String Models and Market Models. (CentER Discussion Paper; Vol. 2002-28). Tilburg: Finance.
Kerkhof, F.L.J. ; Pelsser, A. / Observational Equivalence of Discrete String Models and Market Models. Tilburg : Finance, 2002. (CentER Discussion Paper).
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Kerkhof, FLJ & Pelsser, A 2002 'Observational Equivalence of Discrete String Models and Market Models' CentER Discussion Paper, vol. 2002-28, Finance, Tilburg.

Observational Equivalence of Discrete String Models and Market Models. / Kerkhof, F.L.J.; Pelsser, A.

Tilburg : Finance, 2002. (CentER Discussion Paper; Vol. 2002-28).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Observational Equivalence of Discrete String Models and Market Models

AU - Kerkhof, F.L.J.

AU - Pelsser, A.

N1 - Pagination: 10

PY - 2002

Y1 - 2002

N2 - 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.

AB - 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.

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KW - market model

M3 - Discussion paper

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T3 - CentER Discussion Paper

BT - Observational Equivalence of Discrete String Models and Market Models

PB - Finance

CY - Tilburg

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Kerkhof FLJ, Pelsser A. Observational Equivalence of Discrete String Models and Market Models. Tilburg: Finance. 2002. (CentER Discussion Paper).