Asia-Pacific Financial Markets

, Volume 10, Issue 1, pp 59–85 | Cite as

Prediction of Individual Bond Prices via a Dynamic Bond Pricing Model: Application to Japanese Government Bond Price Data

  • Hiroshi Tsuda
Article

Abstract

In this paper, we propose a dynamic bond pricing model and report the usefulness of our bond pricing model based on analysis of Japanese Government bond price data. We extend the concept of the time dependent Markov (TDM) model proposed by Kariya and Tsuda (Financial Engineering and the Japanese Markets, Kluwer Academic Publishers, Dordrecht, The Netherlands, Vol. 1, pp. 1–20) to a dynamic model, which can obtain information for future bond prices. A main feature of the extended model is that the whole stochastic process of the random cash-flow discount functions of each individual bond has a time series structure. We express the dynamic structure for the models by using a Bayesian state space representation. The state space approach integrates cross-sectional and time series aspects of individual bond prices. From the empirical results, we find useful evidence that our model performs well for the prediction of the patterns of the term structure of the individual bond returns.

Bayesian state space representation dynamic bond pricing model Kalman filter random cash-flow discount function 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Hiroshi Tsuda
    • 1
  1. 1.Financial Research GroupThe NLI Research InstituteTokyoJapan

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