Assessing Italian Government bonds’ term structure with CIR model in the aftermath of EMU

Abstract

In this article we analyse the term structure of the Italian Government bonds after the adoption of Euro currency. In such a framework, we make use of the CIR model and deal with the degree of different volatilities of the maturities considered. To cope with this problem, we propose a simple correction formula and make use of a reaction function to take into account the influence of the monetary policy of the ECB with the result of considerably improving the performance of the model.