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Estimating the Term Structure with Linear Regressions: Getting to the Roots of the Problem
[Term Structure Persistence]

Author

Listed:
  • Adam Goliński
  • Peter Spencer

Abstract

Linear estimators of the affine term structure model are inconsistent since they cannot reproduce the factors used in estimation. This is a serious handicap empirically, giving a worse fit than the conventional ML estimator that ensures consistency. We show that a simple self-consistent estimator can be constructed using the eigenvalue decomposition of a regression estimator. The remaining parameters of the model follow analytically. Estimates from this model are virtually indistinguishable from that of the ML estimator. We apply the method to estimate various models of U.S. Treasury yields. These exercises greatly extend the range of models that can be estimated.

Suggested Citation

  • Adam Goliński & Peter Spencer, 2021. "Estimating the Term Structure with Linear Regressions: Getting to the Roots of the Problem [Term Structure Persistence]," Journal of Financial Econometrics, Oxford University Press, vol. 19(5), pages 960-984.
    • Handle: RePEc:oup:jfinec:v:19:y:2021:i:5:p:960-984.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbz031
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    Cited by:

    1. Januj Juneja, 2025. "What is the Effect of Restrictions Imposed by Principal Components Analysis on the Empirical Performance of Dynamic Term Structure Models?," Computational Economics, Springer;Society for Computational Economics, vol. 65(5), pages 2505-2543, May.
    2. Januj Amar Juneja, 2021. "How do invariant transformations affect the calibration and optimization of the Kalman filtering algorithm used in the estimation of continuous-time affine term structure models?," Computational Management Science, Springer, vol. 18(1), pages 73-97, January.
    3. Januj Amar Juneja, 2022. "A Computational Analysis of the Tradeoff in the Estimation of Different State Space Specifications of Continuous Time Affine Term Structure Models," Computational Economics, Springer;Society for Computational Economics, vol. 60(1), pages 173-220, June.
    4. Meldrum, Andrew & Raczko, Marek & Spencer, Peter, 2023. "The information in joint term structures of bond yields," Journal of International Money and Finance, Elsevier, vol. 134(C).
    5. Antonio Diez de los Rios, 2017. "Optimal Estimation of Multi-Country Gaussian Dynamic Term Structure Models Using Linear Regressions," Staff Working Papers 17-33, Bank of Canada.

    More about this item

    Keywords

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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