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A two-factor model of the German term structure of interest rates

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Author Info
Nuno Cassola
Jorge Barros Luís
Abstract

This paper shows that a two-factor constant volatility model provides an adequate description of the dynamics and shape of the German term structure of interest rates from 1972 up to 1998. The model also provides reasonable estimates of the volatility and term premium curves. Following the conjecture that the two factors driving the German term structure of interest rates represent the ex - ante real interest rate and the expected inflation rate, the identification of one factor with expected inflation is discussed. The estimates are obtained using a Kalman filter and a maximum likelihood procedure including in the measurement equation both the yields and their volatilities.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 13 (2003)
Issue (Month): 11 (November)
Pages: 783-806
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Handle: RePEc:taf:apfiec:v:13:y:2003:i:11:p:783-806

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Stefan Gerlach, 1995. "The information content of the term structure: evidence for Germany," BIS Working Papers 29, Bank for International Settlements. [Downloadable!]
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  2. Koedijk, Kees G & Kool, Clemens J M, 1995. "Future Inflation and the Information in International Term Structures," Empirical Economics, Springer, vol. 20(2), pages 217-42.
  3. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 16-33. [Downloadable!]
  4. Philippe Jorion & Frederic Mishkin, 1991. "A Multi-Country Comparison of Term Structure Forecasts at Long Horizons," NBER Working Papers 3574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. David Backus & Silverio Foresi & Abon Mozumdar & Liuren Wu, 1998. "Predictable Changes in Yields and Forward Rates," NBER Working Papers 6379, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Jacobs, Mike & Remolona, Eli & Wickens, Michael R, 1998. "What was the Market's View of UK Monetary Policy? Estimating Inflation Risk and Expected Inflation with Indexed Bonds," CEPR Discussion Papers 2022, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Frederic S. Mishkin, 1990. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  9. Mishkin, Frederic S, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 815-28, August. [Downloadable!] (restricted)
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  10. Mishkin, Frederic S., 1991. "A multi-country study of the information in the shorter maturity term structure about future inflation," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 2-22, March. [Downloadable!] (restricted)
  11. David Backus & Silverio Foresi & Chris Telmer, 1998. "Discrete-Time Models of Bond Pricing," NBER Working Papers 6736, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
  13. Yash P. Mehra, 1997. "The bond rate and actual future inflation," Working Paper 97-03, Federal Reserve Bank of Richmond. [Downloadable!]
  14. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York. [Downloadable!]
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  15. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 385-426. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Peter Vlaar, 2007. "Term Structure Modeling for Pension Funds:What to do in Practice?," DNB Working Papers 123, Netherlands Central Bank, Research Department. [Downloadable!]
  2. Fendel, Ralf, 2004. "Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates," Discussion Paper Series 1: Economic Studies 2004,24, Deutsche Bundesbank, Research Centre. [Downloadable!]
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