Square-root unscented Kalman filtering of a term structure model of interest rates

Authors:
Shu Wu
Affiliations:
Department of Management Science and System Engineering, Nanjing University of Aeronautics and Astronautics, Nan Jing, Jiang Su Province, P.R.China
Venue:
IMCAS'10 Proceedings of the 9th WSEAS international conference on Instrumentation, measurement, circuits and systems
Year:
2010

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Digital Signal Processing

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Abstract

The theory of the term structure of interest rates is of fundamental importance in financial engineering. In this paper, Square-Root Unscented Kalman Filter (SRUKF) algorithm is used to estimate a popular term structure model of interest rates. Simulation tests are conducted based on SRUKF and Extended Kalman Filter (EKF) respectively. The numerical results show that both approaches are capable of tracking changes in term structure and demonstrate the superior performance of SRUKF-based estimator.