Direct estimation of the risk neutral factor dynamics of Gaussian term structure models

This paper proposes panel data tests of Gaussian affine term structure models. Yield curve data for different moments in time are pooled with the factors treated as fixed effects. With fixed effects the time series properties of the price of risk can be ignored. Results of tests with US interest rat...

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Bibliographic Details
Published in:Journal of econometrics 2003-11, Vol.117 (1), p.179-206
Main Authors: Bams, Dennis, Schotman, Peter C.
Format: Article
Language:English
Subjects:
Affine models
Applications
Applied sciences
Data analysis
Dynamics
Econometrics
Economic theory
Estimating techniques
Exact sciences and technology
Inference from stochastic processes
time series analysis
Insurance, economics, finance
Interest rates
Mathematical models
Mathematics
Model testing
Multivariate analysis
Operational research and scientific management
Operational research. Management science
Panel data
Principal components analysis
Probability and statistics
Risk
Risk neutral valuation
Risk theory. Actuarial science
Sciences and techniques of general use
Statistics
Studies
Term structure of interest rates
Valuation
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Summary:This paper proposes panel data tests of Gaussian affine term structure models. Yield curve data for different moments in time are pooled with the factors treated as fixed effects. With fixed effects the time series properties of the price of risk can be ignored. Results of tests with US interest rate data show that the Gaussian model is able to capture the cross sectional structure of yields as well as unrestricted factor loadings from principal components analysis. However, estimates of the mean reversion parameters in a 3-factor model differ significantly when the model is estimated from yield levels or forward differences, which is inconsistent with the Gaussian model.
ISSN:0304-4076
1872-6895
DOI:10.1016/S0304-4076(03)00122-2