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Estimation of a nonparametric model for bond prices from cross-section and time series information

Bonsoo Koo, Davide La Vecchia and Oliver Linton

Journal of Econometrics, 2021, vol. 220, issue 2, 562-588

Abstract: We develop a novel estimation methodology for an additive nonparametric panel model that is suitable for capturing the pricing of coupon-paying government bonds followed over many time periods. We use our model to estimate the discount function and yield curve of nominally riskless government bonds. The novelty of our approach is the combination of two different techniques: cross-sectional nonparametric methods and kernel estimation for time varying dynamics in the time series context. The resulting estimator is used for predicting individual bond prices given the full schedule of their future payments. In addition, it is able to capture the yield curve shapes and dynamics commonly observed in the fixed income markets. We establish the consistency, the rate of convergence, and the asymptotic normality of the proposed estimator. A Monte Carlo exercise illustrates the good performance of the method under different scenarios. We apply our methodology to the daily CRSP bond market dataset, and compare ours with the popular Diebold and Li (2006) method.

Keywords: Nonparametric inference; Panel data; Time varying; Yield curve dynamics (search for similar items in EconPapers)
JEL-codes: C13 C14 C22 G12 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Estimation of a Nonparametric Model for Bond Prices from Cross-Section and Time Series Information (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:220:y:2021:i:2:p:562-588

DOI: 10.1016/j.jeconom.2020.04.014

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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