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

Multi-Factor Cox-Ingersoll-Ross Models of the Term Structure: Estimates and Tests from a Kalman... 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

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

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Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1024736903090
Publisher site
See Article on Publisher Site

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.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 4, 2004

References

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