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Identification and Estimation of Gaussian Affine Term Structure Models

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  • James D. Hamilton
  • Jing Cynthia Wu

Abstract

This paper develops new results for identification and estimation of Gaussian affine term structure models. We establish that three popular canonical representations are unidentified, and demonstrate how unidentified regions can complicate numerical optimization. A separate contribution of the paper is the proposal of minimum-chi-square estimation as an alternative to MLE. We show that, although it is asymptotically equivalent to MLE, it can be much easier to compute. In some cases, MCSE allows researchers to recognize with certainty whether a given estimate represents a global maximum of the likelihood function and makes feasible the computation of small-sample standard errors.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17772.

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Date of creation: Jan 2012
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Publication status: published as Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.
Handle: RePEc:nbr:nberwo:17772

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Cited by:
  1. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 110-138.
  2. Michael D. Bauer, 2011. "Term premia and the news," Working Paper Series, Federal Reserve Bank of San Francisco 2011-03, Federal Reserve Bank of San Francisco.
  3. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Testable implications of affine term structure models," Journal of Econometrics, Elsevier, Elsevier, vol. 178(P2), pages 231-242.
  4. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 3-46, 02.
  5. Mirkov, Nikola & Sutter, Barbara, 2012. "Central Bank Reserves and the Yield Curve at the ZLB," Working Papers on Finance 1208, University of St. Gallen, School of Finance.
  6. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 28(C), pages 119-129.
  7. James D. Hamilton & Jing Cynthia Wu, 2013. "Risk Premia in Crude Oil Futures Prices," NBER Working Papers 19056, National Bureau of Economic Research, Inc.
  8. Mirkov, Nikola, 2012. "International Financial Transmission of the US Monetary Policy: An Empirical Assessment," Working Papers on Finance 1201, University of St. Gallen, School of Finance.
  9. Barillas, Francisco & Nimark, Kristoffer P, 2013. "Speculation, Risk Premia and Expectations in the Yield Curve," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9755, C.E.P.R. Discussion Papers.
  10. Mirko Abbritti & Luis Gil-Alana & Yuliya Lovcha & Antonio Moreno, 2012. "Term Structure Persistence," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 26/12, School of Economics and Business Administration, University of Navarra.
  11. James D. Hamilton & Jing Cynthia Wu, 2014. "Effects of Index-Fund Investing on Commodity Futures Prices," NBER Working Papers 19892, National Bureau of Economic Research, Inc.
  12. Olena Chyruk & Luca Benzoni & Andrea Ajello, 2012. "Core and `Crust': Consumer Prices and the Term Structure of Interest Rates," 2012 Meeting Papers, Society for Economic Dynamics 922, Society for Economic Dynamics.

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