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
Date Written: August 2, 2014
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: Suggested Citation