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An Empirical Investigation of the Two-Factor Brennan-Schwartz Term Structure Model

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  • Hsin, Chin-Wen

Abstract

This paper studies the pricing behaviors of default-free bonds based on the two-factor model by Brennan and Schwartz (1979), where a short-term spot rate and a long-term consol rate are the state variables. The logarithm of these two factors is assumed to follow a linear transformation of an Ornstein-Uhlenbeck process. An exact discrete time model is derived to estimate the parameters in the process. The model prices are then numerically solved. The sensitivity analysis indicates that the long-rate process, especially the long-rate volatility parameter, is important in characterizing the term structure of interest rates. Copyright 1995 by Kluwer Academic Publishers

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  • Hsin, Chin-Wen, 1995. "An Empirical Investigation of the Two-Factor Brennan-Schwartz Term Structure Model," Review of Quantitative Finance and Accounting, Springer, vol. 5(1), pages 71-92, March.
    • Handle: RePEc:kap:rqfnac:v:5:y:1995:i:1:p:71-92
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    Cited by:

    1. Fuchun Li, 2015. "Testing for the Diffusion Matrix in a Continuous-Time Markov Process Model with Applications to the Term Structure of Interest Rates," Staff Working Papers 15-17, Bank of Canada.
    2. John Knight & Fuchun Li & Mingwei Yuan, 2006. "A Semiparametric Two-Factor Term Structure Model," Journal of Financial Econometrics, Oxford University Press, vol. 4(2), pages 204-237.

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