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An examination of a model of the term structure of interest rates : Kennedy's model Sakellaris, Konstantinos

Abstract

We examine the term structure model proposed by Kennedy (1994). The model assumes that the interest rates can be described as a Gaussian Random Field. We find conditions that the drift and covariance function of the forward rates have to satisfy. We then try to calibrate the model using a number of approaches. Finally the proposed covariance function by Kennedy (1997) is tested.

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