Title: Are multi-factor Gaussian term structure models still useful? An empirical analysis on Italian BTPs,
Abstract: In this paper, we empirically study models for pricing Italian sovereign
bonds under a reduced form framework, by assuming different dynamics for the
short-rate process. We analyze classical Cox-Ingersoll-Ross and Vasicek
multi-factor models, with a focus on optimization algorithms applied in the
calibration exercise. The Kalman filter algorithm together with a maximum
likelihood estimation method are considered to fit the Italian term-structure
over a 12-year horizon, including the global financial crisis and the euro area
sovereign debt crisis. Analytic formulas for the gradient vector and the
Hessian matrix of the likelihood function are provided.