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

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

Author Info

Jorge Barros Luís (Banco Banif Investimento, 30 - 9004-509 Funchal, Brazil.)
Nuno Cassola () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

Abstract

In this paper we show 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. Our estimates are obtained using a Kalman filter and a maximum likelihood procedure including in the measurement equation both the yields and their volatilities. JEL Classification: E43; G12.

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Paper provided by European Central Bank in its series Working Paper Series with number 46.

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Length: 64 pages
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:ecb:ecbwps:20010046

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References listed on IDEAS
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Stefan Gerlach, 1995. "The information content of the term structure: evidence for Germany," BIS Working Papers 29, Bank for International Settlements. [Downloadable!]
Other versions:
- Gerlach, Stefan, 1995. "The Information Content of the Term Structure: Evidence for Germany," CEPR Discussion Papers 1264, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Other versions:
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Other versions:
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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)
Other versions:
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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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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)
Other versions:
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Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements. [Downloadable!]
Other versions:
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- 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)
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)
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Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 59-76, January. [Downloadable!] (restricted)
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Full references

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.)

Rasmus Pilegaard & Alain Durre & Snorre Evjen, 2003. "Estimating risk premia in money market rates," Working Paper Series 221, European Central Bank. [Downloadable!]
Konstantijn Maes, 2004. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," Research series 200402, National Bank of Belgium. [Downloadable!]
Other versions:
- Konstantijn Maes & Konstantijn Maes, 2003. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," International Economics Working Papers Series wpie008, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics. [Downloadable!]
Viktors Ajevskis & Kristine Vitola, 2006. "A Factor Model of the Term Structure of Interest Rates and Risk Premium Estimation for Latvia's Money Market," Working Papers 2006/01, Latvijas Banka. [Downloadable!]

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