Phenomenology of the term structure of interest rates with Pade Approximants

Citation
J. Nuyts et I. Platten, Phenomenology of the term structure of interest rates with Pade Approximants, PHYSICA A, 299(3-4), 2001, pp. 528-546
Citations number
42
Language
INGLESE
art.tipo
Article
Categorie Soggetti
Physics
Journal title
PHYSICA A
ISSN journal
0378-4371 → ACNP
Volume
299
Issue
3-4
Year of publication
2001
Pages
528 - 546
Database
ISI
SICI code
0378-4371(20011015)299:3-4<528:POTTSO>2.0.ZU;2-R
Abstract
The classical approach in finance attempts to model the term. structure of interest rates using specified stochastic processes and the no arbitrage ar gument. Up to now, no universally accepted theory has been obtained for the description of experimental data. We have chosen a more phenomenological a pproach. It is based on results obtained some 20 years ago by physicists, r esults which show that Pade Approximants are most suitable for approximatin g large classes of functions in a very precise and coherent way. In this pa per, we have chosen to compare the Pade Approximants with very low indices with the experimental densities of interest rates variations. We have shown that the data published by the Federal Reserve System in the United States are very well reproduced with two parameters only. These parameters are ra ther simple functions of the lag and of the maturity and are directly relat ed to the moments of the distributions. (C) 2001 Elsevier Science BY. All r ights reserved.