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Design and Estimation of Quadratic Term Structure Models

  • Markus Leippold

    (University of Zurich)

  • Liuren Wu

    (Fordham University)

We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two­factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.

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File URL: http://econwpa.repec.org/eps/fin/papers/0207/0207014.pdf
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Paper provided by EconWPA in its series Finance with number 0207014.

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Length: 49 pages
Date of creation: 30 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpfi:0207014
Note: Type of Document - pdf; prepared on MikTex; to print on postscript; pages: 49 ; figures: included. produced via dvipdfm
Contact details of provider: Web page: http://econwpa.repec.org

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  9. Jonathan E. Ingersoll Jr. & Philip H. Dybvig & Stephen A. Ross, 1998. "Long Forward and Zero-Coupon Rates Can Never Fall," Yale School of Management Working Papers ysm45, Yale School of Management.
  10. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
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  12. David Backus & Silverio Foresi & Abon Mozumdar & Liuren Wu, 1998. "Predictable Changes in Yields and Forward Rates," NBER Working Papers 6379, National Bureau of Economic Research, Inc.
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  19. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
  20. Roberds, William & Whiteman, Charles H., 1999. "Endogenous term premia and anomalies in the term structure of interest rates: Explaining the predictability smile," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 555-580, December.
  21. Markus Leippold & Liuren Wu, 2002. "Asset Pricing Under The Quadratic Class," Finance 0207015, EconWPA.
  22. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso Problem" Explanations for Term Structure Anomalies," NBER Working Papers 6147, National Bureau of Economic Research, Inc.
  23. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 243-288, March.
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  26. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
  27. Markus Leippold & Liuren Wu, 1999. "The Potential Approach to Bond and Currency Pricing," Finance 9903004, EconWPA.
  28. Fabio Mercurio & Juan M. Moraleda, 1996. "A Family of Humped Volatility Structures," Tinbergen Institute Discussion Papers 96-169/2, Tinbergen Institute.
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