Consistent Versus Non-Consistent Term Structure Models : Some Evidence from the Spanish Market

This article prices caps and swaptions in the Spanish market using the Vasicek, Cox, Ingersoll, and Ross and Hull and White (HW) models. Derivative prices obtained with the Vasicek and CIR models estimated from time series data are very similar, but they differ substantially from the values given by the HW model fitted to the term structure of interest rate swap yields (especially for at-the-money and out-of-the-money options). When the former models are estimated cross-sectionally, they produce option prices similar to those of the HW model. In samples of caps and swaptions, the Vasicek model estimated cross-sectionally outperforms the HW model. The Vasicek and CIR models estimated from time series produce very large pricing errors