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- Title
An online estimation scheme for a Hull–White model with HMM-driven parameters.
- Authors
Erlwein, Christina; Mamon, Rogemar
- Abstract
This paper considers the implementation of a mean-reverting interest rate model with Markov-modulated parameters. Hidden Markov model filtering techniques in Elliott (1994, Automatica, 30:1399–1408) and Elliott et al. (1995, Hidden Markov Models: Estimation and Control. Springer, New York) are employed to obtain optimal estimates of the model parameters via recursive filters of auxiliary quantities of the observation process. Algorithms are developed and implemented on a financial dataset of 30-day Canadian Treasury bill yields. We also provide standard errors for the model parameter estimates. Our analysis shows that within the dataset and period studied, a model with two regimes is sufficient to describe the interest rate dynamics on the basis of very small prediction errors and the Akaike information criterion.
- Subjects
MARKOV processes; MATHEMATICAL models; HULL-White model; MATHEMATICS; INTEREST rates; STOCHASTIC processes; STATISTICS
- Publication
Statistical Methods & Applications, 2009, Vol 18, Issue 1, p87
- ISSN
1618-2510
- Publication type
Article
- DOI
10.1007/s10260-007-0082-4