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Empirical Analysis of the Yield Curve: The Information in the Data Viewed through the Window of Cox, Ingersoll, and Ross

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  • Christopher G. Lamoureux
  • H. Douglas Witte

Abstract

This paper uses recent advances in Bayesian estimation methods to exploit fully and efficiently the time‐series and cross‐sectional empirical restrictions of the Cox, Ingersoll, and Ross model of the term structure. We examine the extent to which the cross‐sectional data (five different instruments) provide information about the model. We find that the time‐series restrictions of the two‐factor model are generally consistent with the data. However, the model's cross‐sectional restrictions are not. We show that adding a third factor produces a significant statistical improvement, but causes the average time‐series fit to the yields themselves to deteriorate.

Suggested Citation

  • Christopher G. Lamoureux & H. Douglas Witte, 2002. "Empirical Analysis of the Yield Curve: The Information in the Data Viewed through the Window of Cox, Ingersoll, and Ross," Journal of Finance, American Finance Association, vol. 57(3), pages 1479-1520, June.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:3:p:1479-1520
    DOI: 10.1111/1540-6261.00467
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    References listed on IDEAS

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    Cited by:

    1. Collin-Dufresne, Pierre & Goldstein, Robert S. & Jones, Christopher S., 2009. "Can interest rate volatility be extracted from the cross section of bond yields?," Journal of Financial Economics, Elsevier, vol. 94(1), pages 47-66, October.
    2. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
    3. Ken B. Cyree & James T. Lindley & Drew B. Winters, 2007. "The Effect of Substitute Assets on Yields in Financial Markets," Financial Management, Financial Management Association International, vol. 36(1), pages 27-47, March.
    4. Sanford, Andrew D. & Martin, Gael M., 2005. "Simulation-based Bayesian estimation of an affine term structure model," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 527-554, April.
    5. Piet Sercu & Tom Vinaimont, 2008. "Selecting a Bond‐Pricing Model for Trading: Benchmarking, Pooling, and Other Issues," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1‐2), pages 250-280, January.
    6. Anwar Shaikh, 2019. "The Econ in Econophysics," Working Papers 1913, New School for Social Research, Department of Economics.
    7. Giuliano De Rossi, 2010. "Maximum Likelihood Estimation of the Cox–Ingersoll–Ross Model Using Particle Filters," Computational Economics, Springer;Society for Computational Economics, vol. 36(1), pages 1-16, June.
    8. Januj Amar Juneja, 2022. "A Computational Analysis of the Tradeoff in the Estimation of Different State Space Specifications of Continuous Time Affine Term Structure Models," Computational Economics, Springer;Society for Computational Economics, vol. 60(1), pages 173-220, June.
    9. Bams, Dennis & Schotman, Peter C., 2003. "Direct estimation of the risk neutral factor dynamics of Gaussian term structure models," Journal of Econometrics, Elsevier, vol. 117(1), pages 179-206, November.
    10. Peter Feldhütter, 2016. "Can Affine Models Match the Moments in Bond Yields?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-56, June.
    11. Giuliano De Rossi, 2004. "Maximum likelihood estimation of the Cox-Ingersoll-Ross model using particle filters," Computing in Economics and Finance 2004 302, Society for Computational Economics.
    12. Richard Finlay & Mark Chambers, 2009. "A Term Structure Decomposition of the Australian Yield Curve," The Economic Record, The Economic Society of Australia, vol. 85(271), pages 383-400, December.
    13. Kalimipalli, Madhu & Susmel, Raul, 2004. "Regime-switching stochastic volatility and short-term interest rates," Journal of Empirical Finance, Elsevier, vol. 11(3), pages 309-329, June.
    14. Donati, Paola & Donati, Francesco, 2008. "Modelling and Forecasting the Yield Curve under Model uncertainty," Working Paper Series 917, European Central Bank.
    15. Sen Dong, 2006. "Monetary Policy Rules and Exchange Rates:A Structural VAR Identified by No Arbitrage," 2006 Meeting Papers 875, Society for Economic Dynamics.

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