Review of Finance Vol. 7 No. 1 2003
Design and Estimation of Quadratic Term Structure Models
Abstract
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and show that a flexible specification for the market price of risk is important in capturing the stylized evidence in forecasting relations while factor interactions are indispensable in generating the hump-shaped dynamics of bond yields.
- DOI
- 10.1023/a:1022502724886
- Volume
- 7
- Issue
- 1
- Pages
- 47-73
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex