BFS 2002

Contributed Talk

In this paper, we show that contrary to the claim made in Longstaff, Santa-Clara and Schwartz (2000a,b) discrete string models are not more parsimonious than market models. In fact, they are found to be observationally equivalent. We derive that for the estimation of both a K-factor discrete string model and a K-factor Libor Market Model for N forward rate the number of parameters that needs to be estimated equals NK - 1/2 K(K-1) and not K(K+1)/2 and NK, respectively.       http://www.few.eur.nl/few/people/pelsser/papers/equivalence3.pdf