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Kalman Filtering of Generalized Vasicek Term Structure Models

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  • Babbs, Simon H.
  • Nowman, K. Ben

Abstract

We present a subclass of Langetieg's (1980).linear Gaussian models of the term structure. The bond price is derived in terms of a finite set of state variables with correlated innovations. The subclass contains a reformulation of the double-decay model of Beaglehole and Tenney (1991), enabling us to clarify interpretation of their parameters. We apply Kalman filtering to a state space formulation of the model, allowing measurement errors in the data. One-, two-, and three-factor models are estimated on U.S. data from 1987–1996 and the results indicate the subclass of models can fit the U.S. term structure.

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  • Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March.
  • Handle: RePEc:cup:jfinqa:v:34:y:1999:i:01:p:115-130_00
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