Choosing the Right Error in Term Structure Models
AbstractWe study the influence of measurement error specification on estimation results in the context of continuous-time models of the term structure of interest rates. For this purpose, we estimate a two-factor mean-reverting stochastic model of the recent evolution of the Spanish term structure. The model is estimated under a baseline specification where errors are independent both serially and cross-sectionally, and the factors are general (i.e. unobservable), and under various other specifications, where factors are assumed to be observable, or where errors have either serial correlation, cross-sectional correlation, or both. We find that error specification has an important impact on the value of estimated fundamental parameters, i.e. those that define the continuous-time theoretical model. We conclude that the choice of specification may depend on what is the purpose of estimation, whether fitting, prediction, or accurate estimation of significant economic parameters.
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Bibliographic InfoPaper provided by Centro de Estudios Monetarios Y Financieros- in its series Papers with number 9904.
Length: 47 pages
Date of creation: 1999
Date of revision:
Contact details of provider:
Postal: Centro de Estudios Monetarios Y Financieros. Casado del Alisal, 5-28014 Madrid, Spain.
Web page: http://www.cemfi.es/
More information through EDIRC
ECONOMETRICS ; ESTIMATOR ; ECONOMETRIC MODELS ; INTEREST RATE;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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