Direct Estimation of the Risk Neutral Factor Dynamics of Affine Term Structure Models

38 Pages Posted: 7 Nov 1998

See all articles by Dennis Bams

Dennis Bams

University of Maastricht - Limburg Institute of Financial Economics (LIFE)

Peter C. Schotman

Maastricht University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 1998

Abstract

This paper proposes a panel data framework for tests of affine models of the term structure of interest rates which covers equilibrium (or endogenous) models as well as extended (or exogenous, evolutionary) models. The econometric model pools yield curve data for different moments in time. Since each cross sectional yield curve only depends on the risk neutral factor dynamics, the estimator does not involve any assumptions on the price of risk, or on actual interest rate dynamics. In the empirical application one- and two-factor Gaussian models are tested on U.S. interest rate data. The main empirical results are (i) that a two-factor model can not be rejected, (ii) that mean reversion is highly significant, and (iii) that the extended models are "overdifferenced."

JEL Classification: G13, C33

Suggested Citation

Bams, Dennis and Schotman, Peter C., Direct Estimation of the Risk Neutral Factor Dynamics of Affine Term Structure Models (September 1998). Available at SSRN: https://ssrn.com/abstract=137578 or http://dx.doi.org/10.2139/ssrn.137578

Dennis Bams

University of Maastricht - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3838 (Phone)
+31 43 325 8530 (Fax)

Peter C. Schotman (Contact Author)

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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