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Econometric Analysis of a Continuous Time Multi-Factor Generalized Vasicek Term Structure Model: International Evidence

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  • Simon Babbs
  • K. Nowman

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    Abstract

    In this paper we apply the Kalman filter to a state formulation of a multi-factor term structure model allowing for measurement errors in the data. We estimate one and two factor models using panel data allowing the cross sectional and dynamic implications of the yield curve to be taken into account. The panel data approach has the advantage of using all the information in the yield curve across and over time compared to a time series approach only. The models are estimated on data for the Belgian franc, British pound, Danish krone, Dutch guilder, French franc, German mark, Japanese yen, Italian lira and Swiss franc. Our empirical results indicate that the two factor model represents a good description of the yield curves in these markets. Copyright Kluwer Academic Publishers 1998

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    File URL: http://hdl.handle.net/10.1023/A:1010086132390
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 5 (1998)
    Issue (Month): 2 (May)
    Pages: 159-183

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    Handle: RePEc:kap:apfinm:v:5:y:1998:i:2:p:159-183

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: Kalman filtering; measurement errors; state space model; term structure;

    References

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    1. Nowman, K B, 1997. " Gaussian Estimation of Single-Factor Continuous Time Models of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 52(4), pages 1695-1706, September.
    2. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July.
    3. Geyer, Alois L J & Pichler, Stefan, 1999. "A State-Space Approach to Estimate and Test Multifactor Cox-Ingersoll-Ross Models of the Term Structure," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(1), pages 107-30, Spring.
    4. Pennacchi, George G, 1991. "Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 53-86.
    5. Ball, Clifford A. & Torous, Walter N., 1996. "Unit roots and the estimation of interest rate dynamics," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 215-238, June.
    6. Narasimhan Jegadeesh & George G. Pennacchi, 1996. "The behavior of interest rates implied by the term structure of Eurodollar future," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-451.
    7. Duan, Jin-Chuan & Simonato, Jean-Guy, 1999. " Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter," Review of Quantitative Finance and Accounting, Springer, vol. 13(2), pages 111-35, September.
    8. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
    9. Langetieg, Terence C, 1980. " A Multivariate Model of the Term Structure," Journal of Finance, American Finance Association, vol. 35(1), pages 71-97, March.
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    Cited by:
    1. Francesco Menoncin & Olivier Scaillet, 2003. "Mortality Risk and Real Optimal Asset Allocation for Pension Funds," FAME Research Paper Series rp101, International Center for Financial Asset Management and Engineering.
    2. Menoncin, Francesco, 2008. "The role of longevity bonds in optimal portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 343-358, February.
    3. Markus Junker & Alexander Szimayer & Niklas Wagner, 2004. "Nonlinear Term Structure Dependence: Copula Functions, Empirics, and Risk Implications," Econometrics 0401007, EconWPA.
    4. Junker, Markus & Szimayer, Alex & Wagner, Niklas, 2006. "Nonlinear term structure dependence: Copula functions, empirics, and risk implications," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1171-1199, April.
    5. Menoncin, Francesco, 2005. "Cyclical risk exposure of pension funds: A theoretical framework," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 469-484, June.
    6. Nowman, Khalid Ben, 2010. "Modelling the UK and Euro yield curves using the Generalized Vasicek model: Empirical results from panel data for one and two factor models," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 334-341, December.

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