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Abstract

This paper addresses the problem of conducting a nonparametric test of the dimension of the state variable vector in a continuous-time term structure model. The paper shows that a bivariate diffusion function of the short rate process is a sufficient condition for the term structure to be driven by two stochastic factors. Using an easy-to-implement kernel smoothing method the number of state variables can be tested under very unrestrictive assumptions. The results suggest that continuous-time models for the US interest rates should contain at least two stochastic factors.

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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb012106.

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Date of creation: Mar 2001
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Handle: RePEc:cte:wbrepe:wb012106

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Find related papers by JEL classification:

• E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
• E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
• C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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33. repec:cup:macdyn:v:1:y:1997:i:1:p:135-68 is not listed on IDEAS
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