Tests of non linear Gaussian term structure models

Realdon, Marco (2016) Tests of non linear Gaussian term structure models. Journal of International Financial Markets Institutions & Money, 44. pp. 128-147. ISSN 1042-4431

Full text not available from this repository. (Request a copy)
Official URL: https://doi.org/10.1016/j.intfin.2016.05.002


Since the 2008 financial crisis Government bond yields in US, Europe and elsewhere have been historically low and challenged term structure models that cannot rule out negative yields. This paper uses US and German Government yields to test three factor Gaussian models that do and that do not rule out negative yields, namely affine models, quadratic models, extensions of the Black and Black–Karasinski models. Quadratic models and a Vasicek-type model best fit observed yields when the stochastic factors driving the short rate are correlated. However the Black–Karasinski model for the US and the Black model for both US and Germany can best fit yields when interest rates are lowest, i.e. after 2008, despite the restriction of independent factors driving the short rate. A new linear-quadratic model whereby the central tendency of the short rate is a non-negative quadratic function of Gaussian factors performs particularly well for German yields. All models fit German yields better than US yields. All models fit the one year yield worse than longer term yields.

Item Type: Article
Uncontrolled Keywords: quadratic model, black model, Vasicek model, Black–Karasinski model, method of lines, extended Kalman filter
Subjects: N300 Finance
Department: Faculties > Business and Law > Newcastle Business School
Depositing User: Ay Okpokam
Date Deposited: 09 Nov 2016 12:46
Last Modified: 19 Nov 2019 09:04
URI: http://nrl.northumbria.ac.uk/id/eprint/28465

Actions (login required)

View Item View Item


Downloads per month over past year

View more statistics