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Estimating the term structure with linear regressions: Getting to the roots of the problem

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  • Adam Golinski
  • 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. The fit of this model is virtually indistinguishable from that of the ML estimator. We apply the method to estimate various models of U.S. Treasury yields and a joint model of the U.S. and German yield curves.

Suggested Citation

  • Adam Golinski & Peter Spencer, 2019. "Estimating the term structure with linear regressions: Getting to the roots of the problem," Discussion Papers 19/05, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:19/05
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    References listed on IDEAS

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    1. Michael D. Bauer, 2018. "Restrictions on Risk Prices in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(2), pages 196-211, April.
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    10. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, vol. 110(1), pages 110-138.
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    Cited by:

    1. 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.
    2. 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.
    3. 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).
    4. 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.

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    More about this item

    Keywords

    term structure; linear regression estimators; self-consistent model; estimation methods; two-country model.;
    All these keywords.

    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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