Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach
|Author(s):||Ram Bhar and Carl Chiarella|
|Date of publication:||December 1995|
|Working paper number:||56|
The volatility structure of 90-day bill futures traded on the the Sydney Futures Exchange is analysed within the framework of the Heath-Jarrow-Morton model. The method involves characterisation of the transition probability density function for the forward rate process represented by the stochastic differential equation in the arbitrage-free economy. Maximisation of the likelihood function then results in the estimates of the parameters of the volatility function. The volatility function is also used in a simulation of the preference-free stochastic differential equation for bill prices.
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Bhar, R. and Chiarella, C. 1996, Construction of Zero-Coupon Yield Curve from Coupon Bond Yield Using Australian Data, Working Paper: 70, Finance Discipline Group, University of Technology, Sydney.