Interest Rate Calibration and Parameter Estimation of Affine Term Structure Models

Understanding and modelling interest rate term structure models is a challenging topic in financial research. Parameter estimation of affine term structure models is one of the areas that poses a computational challenge in... [ view full abstract ]

Understanding and modelling interest rate term structure models is a challenging topic in financial research. Parameter estimation of affine term structure models is one of the areas that poses a computational challenge in this domain. We establish the exponential integrability of short rate over a bond using Euler and Milstein approximations for the Two-Factor Cox-Ingersoll-Ross model. We confirm the convergence of the bond prices simulated using each of the approximations. Finally, we look at parameter estimation for the model based on the simulated prices using Singleton’s empirical characteristic function (ECF) techniques.