Multi-Factor Cox-Ingersoll-Ross Models of the Term Structure: Estimates and Tests from a Kalman Filter Model

Posted: 20 Mar 2003

See all articles by Ren-Raw Chen

Ren-Raw Chen

Fordham University - Gabelli School of Business

Louis Scott

Morgan Stanley - United Kingdom Office

Abstract

This paper presents a method for estimating multi-factor versions of the Cox, Ingersoll, Ross (1985b) model of the term structure of interest rates. The fixed parameters in one, two, and three factor models are estimated by applying an approximate maximum likelihood estimator in a state-space model using data for the U.S. treasury market. A nonlinear Kalman filter is used to estimate the unobservable factors. Multi-factor models are necessary to characterize the changing shape of the yield curve over time, and the statistical tests support the case for two and three factor models. A three factor model would be able to incorporate random variation in short term interest rates, long term rates, and interest rate volatility.

Keywords: interest rates, term structure, Kalman filter

Suggested Citation

Chen, Ren-Raw and Scott, Louis, Multi-Factor Cox-Ingersoll-Ross Models of the Term Structure: Estimates and Tests from a Kalman Filter Model. Journal of Real Estate Finance and Economics, Vol. 27, No. 2. Available at SSRN: https://ssrn.com/abstract=366860

Ren-Raw Chen (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Louis Scott

Morgan Stanley - United Kingdom Office ( email )

Cabot Square, Canary Whart
London, E14 4QW
United Kingdom
44 207 425 6581 (Phone)

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