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.
UBOLDI Adamo;
BERNASCHI Massimo;
TOROSANTUCCI Luca;
2007-04-11
ELSEVIER SCIENCE BV
JRC35019
https://publications.jrc.ec.europa.eu/repository/handle/JRC35019,
10.1016/j.physa.2006.10.072,
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