The SR Approach: A New Estimation Procedure for Non-Linear and Non-Gaussian Dynamic Term Structure Models

70 Pages Posted: 9 Mar 2010 Last revised: 5 Aug 2014

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Bent Jesper Christensen

Aarhus University; Aarhus University; Aarhus University

Date Written: August 2, 2014

Abstract

This paper suggests a new approach for estimating linear and non-linear dynamic term structure models with latent factors. We impose no distributional assumptions on the factors which therefore may be non-Gaussian. The novelty of our approach is to use many observables (yields or bond prices) in the cross-section dimension. This implies that the latent factors can be determined quite accurately by a sequence of cross-section regressions. We also show how output from these regressions can be used to obtain model parameters by a two- or three-step moment-based estimation procedure.

Keywords: Bond data, GMM, Non-linear filtering, Non-linear least squares, SMM

JEL Classification: C10, C30

Suggested Citation

Andreasen, Martin M. and Christensen, Bent Jesper, The SR Approach: A New Estimation Procedure for Non-Linear and Non-Gaussian Dynamic Term Structure Models (August 2, 2014). Available at SSRN: https://ssrn.com/abstract=1566829 or http://dx.doi.org/10.2139/ssrn.1566829

Martin M. Andreasen (Contact Author)

Aarhus University ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Bent Jesper Christensen

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

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