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Empirical Tests of Interest Rate Model Pricing Kernels

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  • Joshua Rosenberg

Abstract

This paper estimates and tests consumption-based pricing kernels used in common equilibrium interest rate term structure models. In contrast to previous papers that use return orthogonality conditions, estimation in this paper is accomplished using moment conditions from a consumption-based option pricing equation and market prices of interest rate options. This methodology is more sensitive to preference misspecification over states associated with large changes in consumption than previous techniques. In addition, this methodology provides a large set of natural moment conditions to use in estimation and testing compared to an arbitrary choice of return orthogonality conditions (e.g. instruments selected) used in GMM estimation.

Suggested Citation

  • Joshua Rosenberg, 1999. "Empirical Tests of Interest Rate Model Pricing Kernels," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-015, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-015
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    References listed on IDEAS

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    Cited by:

    1. Grace Kuan, 2000. "Recovering Local Volatility Functions Of Forward Libor Rates," Computing in Economics and Finance 2000 255, Society for Computational Economics.
    2. Joshua Rosenberg, 2000. "Asset Pricing Puzzles: Evidence from Options Markets," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-025, New York University, Leonard N. Stern School of Business-.

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