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Testing Linearity in Term Structures

Listed author(s):
  • Peroni, Chiara

Recent empirical studies suggests that affine models, a popular framework to analyse term structures of interest rates, are misspecified. This evidence is mainly based on time series properties of the data. This article re-examines this controversy, by investigating both cross-sectional and dynamic properties of affine models. To do so, it applies robust non-parametric techniques to two different sets of financial data, which contain information on the UK and US yield curve. The analysis shows the strong non-linearity in the relationship of yields to the US and UK short rate. The non-linear pattern is concave in the state variable, and increasing with respect to the maturity, for both countries. Linear and non-linear specifications are then compared by means of a formal statistical criterion, the Generalised Likelihood-Ratio test statistics, which confirms evidence against the linear specification.

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File URL: https://mpra.ub.uni-muenchen.de/16471/1/MPRA_paper_16471.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16471.

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Date of creation: 13 Jul 2009
Handle: RePEc:pra:mprapa:16471
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