The Dynamics of the Forward Interest Rate Curve: A Formulation with State Variables
Pedro Santa-Clara
Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Frank De Jong
Tilburg University - Department of Finance
Journal of Financial and Quantitative Analysis, March 1999
Abstract:
The objective of this paper is twofold. First, the paper develops a class of models of the term structure of interest rates, in the Heath, Jarrow and Morton (1992) framework, with dynamics characterized by the evolution of a small set of state variables. Second, the paper exploits this characterization of the dynamics of the term structure in an estimation exercise that makes use of both the time series and cross-section of bond prices. In this way, our class of models is shown to bridge the gap between traditional models, such as Cox, Ingersoll and Ross (1985) and Vasicek (1977), that emphasize the dynamics of interest rates and the models of Heath, Jarrow and Morton (1992), that stress fitting the cross-section of bond prices.
JEL Classification: E43, G12
Accepted Paper Series
Suggested Citation
Santa-Clara, Pedro and De Jong, Frank, The Dynamics of the Forward Interest Rate Curve: A Formulation with State Variables. Journal of Financial and Quantitative Analysis, March 1999. Available at SSRN: http://ssrn.com/abstract=142140
