WIAS Preprint No. 759, (2002)

A filtered no arbitrage model for term structures from noisy data



Authors

  • Gombani, Andrea
  • Jaschke, Stefan R.
  • Runggaldier, Wolfgang R.

2010 Mathematics Subject Classification

  • 93E11 60G35

Keywords

  • term structure of interest rates, linear estimation, Kalman filter

Abstract

We consider an affine term structure model of interest rates, where the factors satisfy a linear diffusion equation. We assume that the information available to an agent comes from observing the yields of a finite number of traded bonds and that this information is not sufficient to reconstruct exactly the factors. We derive a method to obtain arbitrage-free prices of illiquid or non traded bonds that are compatible with the available incomplete information. The method is based on an application of the Kalman filter for linear Gaussian systems.

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