Aït-Sahalia, Yacine Nonparametric pricing of interest rate derivative securities. (English) Zbl 0844.62094 Econometrica 64, No. 3, 527-560 (1996). Summary: We propose a nonparametric estimation procedure for continuous-time stochastic models. Because prices of derivative securities depend crucially on the form of the instantaneous volatility of the underlying process, we leave the volatility function unrestricted and estimate it nonparametrically. Only discrete data are used but the estimation procedure still does not rely on replacing the continuous-time model by some discrete approximation. Instead the drift and volatility functions are forced to match the densities of the process. We estimate the stochastic differential equation followed by the short-term interest rate and compute nonparametric prices for bonds and bond options. Cited in 139 Documents MSC: 62P05 Applications of statistics to actuarial sciences and financial mathematics 62G07 Density estimation 62M05 Markov processes: estimation; hidden Markov models 91G20 Derivative securities (option pricing, hedging, etc.) Keywords:estimation of stochastic differential equations; kernel estimation; discrete-time sampling; option pricing; term structure of interest rates; continuous-time stochastic models; derivative securities; volatility function; drift; short-term interest rate; bond options PDF BibTeX XML Cite \textit{Y. Aït-Sahalia}, Econometrica 64, No. 3, 527--560 (1996; Zbl 0844.62094) Full Text: DOI Link OpenURL