||Impact of No-arbitrage on Interest Rate Dynamics
2015-05-17 , Hitotsubashi University Center for Financial Research
By imposing no-arbitrage condition (NAC), the volatility of changes in interest rates is linked to the cross-section of interest rates. Due to this link, the cross-section may have impact on estimation and rediction of volatility using interest rate data. Furthermore, the volatility may have impact on identi cation of latent factors from the cross-section. In this study, these impacts arising from the NAC are examined, and found to be minor or mitigated without much difficulty. It follows that the resulting dynamics of interest rates do not differ much between estimation with and without imposing the NAC.