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Linear-price term structure models

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  • Gourieroux, C.
  • Monfort, A.

Abstract

We characterize the term structure models in which the zero-coupon prices are linear functions of underlying factors. These models are called Linear-price Term Structure Models (LTSM). We provide two types of LTSM where the observable factors predict regimes which are not observed by the investor. These hidden regimes are represented by a Markov chain, which features either an exogenous, or an endogenous dynamics. We illustrate the possible term structure patterns, their evolutions, in particular their ability to stay close to a zero lower bound.

Suggested Citation

  • Gourieroux, C. & Monfort, A., 2013. "Linear-price term structure models," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 24-41.
    • Handle: RePEc:eee:empfin:v:24:y:2013:i:c:p:24-41
    DOI: 10.1016/j.jempfin.2013.07.004
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    References listed on IDEAS

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    Cited by:

    1. Moreno, Manuel & Novales, Alfonso & Platania, Federico, 2018. "A term structure model under cyclical fluctuations in interest rates," Economic Modelling, Elsevier, vol. 72(C), pages 140-150.
    2. Damir Filipović & Sander Willems, 2016. "Exact Smooth Term Structure Estimation," Swiss Finance Institute Research Paper Series 16-38, Swiss Finance Institute.

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    More about this item

    Keywords

    Linear term structure model; Hidden Markov chain; Finite dimensional dependence; Binding floor;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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