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Improving the term structure of interest rates: two-factor models

✍ Scribed by Lourdes Gómez-Valle; Julia Martínez-Rodríguez

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
241 KB
Volume
15
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

We consider a new approach for estimating the coefficients of the term structure equation in two‐factor models. This approach is based on the fact that the risk‐neutral drifts of the factors are directly estimated. Therefore, the market prices of risk and the physical drifts do not have to be either identified or estimated.

In order to study the finite properties of this approach, we generate trajectories in a stochastic volatility model. We find that the risk‐neutral drifts and the yield curves are more accurately estimated. Finally, we show the supremacy of this approach by means of US Treasury Bill data. Copyright © 2009 John Wiley & Sons, Ltd.

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