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Time-series and Cross-section Information in Affine Term Structure Models

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  • de Jong, Frank

Abstract

In this paper we provide an empirical analysis of the term structure of interest rates using the affine class of term structure models introduced by Duffie and Kan. We estimate these models by combining time-series and cross-section information in a theoretically consistent way. In the estimation we use an exact discretization of the continuous time factor process and allow for a general measurement error structure. We provide evidence that a three factor affine model with correlated factors is able to provide an adequate fit of the cross section and the dynamics of the term structure. The three factors can be given the usual interpretation of level, steepness and curvature. The shocks to these factors are significantly correlated.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2065.

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Date of creation: Feb 1999
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Handle: RePEc:cpr:ceprdp:2065

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Keywords: Kalman Filter; Panel Data; Term Structure;

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  1. Jegadeesh, Narasimhan & Pennacchi, George G, 1996. "The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(3), pages 426-46, August.
  2. repec:fth:inseep:9215 is not listed on IDEAS
  3. Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1998. "The Central Tendency: A Second Factor In Bond Yields," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 62-72, February.
  4. Pagan, A.R., 1996. "Simulation Based Estimation of Some Factor Models in Econometrics," Department of Economics - Working Papers Series, The University of Melbourne 521, The University of Melbourne.
  5. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  6. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers, Toulouse - GREMAQ 92.279, Toulouse - GREMAQ.
  7. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1209-27, July.
  8. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 1-25, January.
  9. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers, Duke University, Department of Economics 95-20, Duke University, Department of Economics.
  10. Alois L. J. Geyer & Stefan Pichler, 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 107-130, 03.
  11. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
  12. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Estimating and Testing Exponential Affine Term Structure Models by Kalman Filter," CIRANO Working Papers 95s-44, CIRANO.
  13. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  14. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1259-82, September.
  15. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  16. Qiang Dai & Kenneth J. Singleton, 1997. "Specification Analysis of Affine Term Structure Models," NBER Working Papers 6128, National Bureau of Economic Research, Inc.
  17. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, Elsevier, vol. 77(2), pages 343-377, April.
  18. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 77-105, January.
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