Title: Empirical Evaluation of the Market Price of Risk using the CIR Model
Authors: UBOLDI ADAMOBERNASCHI MassimoTOROSANTUCCI Luca
Citation: PHYSICA A-STATISTICAL MECHANICS AND ITS APPLICATIONS vol. 376 p. 543-554
Publisher: ELSEVIER SCIENCE BV
Publication Year: 2007
JRC Publication N°: JRC35019
URI: http://publications.jrc.ec.europa.eu/repository/handle/JRC35019
Type: Articles in Journals
Abstract: We describe a simple but effective method for the estimation of the market price of risk. The basic idea is to compare the results obtained by following two different approaches in the application of the Cox-Ingersoll- Ross (CIR) model. In the ¯rst case, we apply the non-linear least squares method to cross sectional data (i.e. all rates of a single day). In the second case, we consider the short rate obtained by means of the ¯rst procedure as a proxy of the real market short rate. Starting from this new proxy, we evaluate the parameters of the CIR model by means of martingale estimation techniques. The estimate of the market price of risk is provided by comparing results obtained with these techniques, since this 2approach makes possible to isolate the market price of risk and evaluate, under the Local Expectations Hypothesis, the risk premium given by the market for different maturities. As a test case, we apply the method to data of the European Fixed Income Market.
JRC Institute:Institute for the Protection and Security of the Citizen

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