Estimating the term structure with linear regressions: Getting to the roots of the problem

Discussion Papers from Department of Economics, University of York

Abstract: Linear estimators of the affine term structure model are inconsistent since they cannot reproduce the factors used in estimation. This is a serious handicap empirically,giving a worse fit than the conventional ML estimator that ensures consistency. We show that a simple self-consistent estimator can be constructed using the eigenvalue decomposition of a regression estimator. The remaining parameters of the model follow analytically. The fit of this model is virtually indistinguishable from that of the ML estimator. We apply the method to estimate various models of U.S. Treasury yields and a joint model of the U.S. and German yield curves.

Keywords: term structure; linear regression estimators; self-consistent model; estimation methods; two-country model. (search for similar items in EconPapers)
JEL-codes: C13 G12 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Estimating the Term Structure with Linear Regressions: Getting to the Roots of the Problem (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:19/05

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