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Knowledge Base » Alternative AR(1) Models for Simulating the DEM/GBP Yield Spread

Alternative AR(1) Models for Simulating the DEM/GBP Yield Spread

Document ID: 1999-290 (previously 1999/028)
Published on: 1st November 1999
Author: Phil Mowbray

A simple approach to modelling yield curves in more than one currency is to assume that the spread between yields in the selected 'baseline' currency (e.g. GBP), and yields in the other countries (eg. DEM) is independent of debt maturity. Here we specify and calibrate a simple first-order autoregressive process for the spread. Note that this model is not used in Barrie & Hibbert's current ESG models.

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