A Semi-Parametric Factor Model of Interest Rates and Tests of the Affine Term Structure
Many continuous time term structure of interest rate models assume a factor structure where the drift and volatility functions are affine functions of the state variable process. These models involve very specific parametric choices of factors and functional specifications of the drift and volatility. Morevoer, under the affine term structure restrictions not all factors necessarily affect interest rates at all maturities simultaneously. This class of so called affine models covers a wide variety of existing empirical as well as theoretical models in the literature. In this paper we take a very agnostic approach to the specification of these diffusion functions and test implications of the affine term structure restrictions. We do not test a specific model among the class of affine models per se. Instead, the affine term structure restrictions we test are based on the derivatives of the responses of interest rates to the factors. We also test how many and which factors affect a particular rate. These tests are conducted within a framework which models interest rates as functions of fundamental factors, and the responses of interest rates to these factors are estimated with non-parametric methods. We consider two sets of factors, one based on key macroeconomic variables, and one based on interest rate spreads. In general, despite their common use we find that the empirical evidence does not support the restrictions imposed by affine models. Besides testing the affine structure restrictions we also uncover a set of fundamental factors which appear remarkably robust in explaining interest rate dynamics at the long and short maturities we consider. Nous étudions les modèles de strucutreà terme des taux d'intérêt. Nous nous penchons plus particulièrement sur une classe de modèles avec structure affinée. Cette classe contient une grande partie des modèles théoriques et pratiques recensés dans la littérature. Nous proposons des tests pour les restrictions imposées par la structure affinée. En utilisant des méthodes semi-paramétriques, nous arrivonsà dériver ces tests sous hypothèses très faibles sur la forme fonctionnelle du processus des facteurs et la forme des relations affinées. Nous introduisons l'estimateur de la dérivée moyenne qui est adaptéà un contexte de séries temporelles. Les résultats empiriques indiquent que les restrictions de la structure affinée sont fortement rejetées par les données.
|Date of creation:||01 Oct 1997|
|Contact details of provider:|| Postal: 1130 rue Sherbrooke Ouest, suite 1400, Montréal, Quéc, H3A 2M8|
Phone: (514) 985-4000
Fax: (514) 985-4039
Web page: http://www.cirano.qc.ca/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
- Powell, James L & Stock, James H & Stoker, Thomas M, 1989. "Semiparametric Estimation of Index Coefficients," Econometrica, Econometric Society, vol. 57(6), pages 1403-1430, November.
- Stanton, Richard, 1997. " A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1973-2002, December.
- Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1998.
"The Central Tendency: A Second Factor In Bond Yields,"
The Review of Economics and Statistics,
MIT Press, vol. 80(1), pages 62-72, February.
- Pierluigi Balduzzi & Sanjiv Das & Silverio Foresi, 1996. "The Central Tendency: A Second Factor in Bond Yields," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-12, New York University, Leonard N. Stern School of Business-.
- Pierluigi Balduzzi & Sanjiv Ranjan Das & Silverio Foresi, 1997. "The Central Tendency: A Second Factor in Bond Yields," NBER Working Papers 6325, National Bureau of Economic Research, Inc.
- Hardle, W., 1992.
"Applied Nonparametric Methods,"
9206, Tilburg - Center for Economic Research.
- Hardle, W., 1992. "Applied Nonparametric Methods," Papers 9204, Catholique de Louvain - Institut de statistique.
- Härdle, W.K., 1992. "Applied Nonparametric Methods," Discussion Paper 1992-6, Tilburg University, Center for Economic Research.
- HÄRDLE, Wolfgang, 1992. "Applied nonparametric methods," CORE Discussion Papers 1992003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Wolfgang Hardle & Oliver Linton, 1994. "Applied Nonparametric Methods," Cowles Foundation Discussion Papers 1069, Cowles Foundation for Research in Economics, Yale University.
- Andrews, Donald W K & Monahan, J Christopher, 1992.
"An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator,"
Econometric Society, vol. 60(4), pages 953-966, July.
- Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
- Powell, James L. & Stoker, Thomas M., 1992. "Optimal bandwidth choice for density-weighted averages," Working papers 3424-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Bansal, Ravi & Viswanathan, S, 1993. " No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, American Finance Association, vol. 48(4), pages 1231-1262, September.
- Yacine Ait-Sahalia, 1995.
"Nonparametric Pricing of Interest Rate Derivative Securities,"
NBER Working Papers
5345, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-560, May.
- Robert J. Shiller & J. Huston McCulloch, 1987.
"The Term Structure of Interest Rates,"
NBER Working Papers
2341, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996.
"Testing Continuous-Time Models of the Spot Interest Rate,"
Review of Financial Studies,
Society for Financial Studies, vol. 9(2), pages 385-426.
- Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985.
"A Theory of the Term Structure of Interest Rates,"
Econometric Society, vol. 53(2), pages 385-407, March.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Oliver LINTON, "undated".
"Applied nonparametric methods,"
Statistic und Oekonometrie
9312, Humboldt Universitaet Berlin.
- Courtadon, Georges, 1982. "The Pricing of Options on Default-Free Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 75-100, March.
- Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
- Stambaugh, Robert F., 1988. "The information in forward rates : Implications for models of the term structure," Journal of Financial Economics, Elsevier, vol. 21(1), pages 41-70, May.
- Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
- Haerdle,Wolfgang & Stoker,Thomas, 1987. "Investigations smooth multiple regression by the method of average derivatives," Discussion Paper Serie A 107, University of Bonn, Germany.
When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:97s-33. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.