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A Nonparametric Dimension Test Of The Term Structure

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  • Javier Gil-Bazo

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  • Gonzalo Rubio

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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Bibliographic Info

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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  2. Federico M. Bandi & Peter C.B. Phillips, 2001. "Fully Nonparametric Estimation of Scalar Diffusion Models," Cowles Foundation Discussion Papers 1332, Cowles Foundation for Research in Economics, Yale University.
  3. David K. Backus & Silverio Foresi & Chris Telmer, . "Discrete time models of bond pricing," GSIA Working Papers 251, Carnegie Mellon University, Tepper School of Business.
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  10. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
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  19. Broze, Laurence & Scaillet, Olivier & Zakoian, Jean-Michel, 1995. "Testing for continuous-time models of the short-term interest rate," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 199-223, September.
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  23. Pritsker, Matt, 1998. "Nonparametric Density Estimation and Tests of Continuous Time Interest Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 449-87.
  24. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July.
  25. 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.
  26. 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.
  27. repec:cup:macdyn:v:1:y:1997:i:1:p:135-68 is not listed on IDEAS
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