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A Three-Factor Econometric Model of the U.S. Term Structure, Research Paper 9619

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A Three-Factor Econometric Model of the U.S. Term Structure, Research Paper 9619

DATE: July 1996

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ABSTRACT: We estimate and test a model of the U.S. term structure that fits both the time series of interest rates and the cross-sectional shapes of the yield and volatility curves. In the model, three unobserved factors drive a stochastic discount process that prices assets so as to rule out arbitrage opportunities. The resulting bond yields are conveniently affine in the factors. We use monthly zero-coupon yield data from January 1986 to March 1996 and estimate the model by applying a Kalman filter that takes into account the model's no-arbitrage restrictions and using only three maturities at a time. The parameter estimates describe a first factor that reverts slowly to a fixed mean and a second factor that reverts relatively quickly to a time-varying mean serving as the third factor. The estimates are robust to the choice of maturities, suggesting that these factors give us an adequate model.

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Gong, Frank F. and Remolona, Eli M. "A Three-Factor Econometric Model of the U.S. Term Structure, Research Paper 9619," Research Papers (Federal Reserve Bank of New York) (July 1996). https://fraser.stlouisfed.org/title/6570/item/615534, accessed on March 23, 2023.

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SUBJECTS:

THEMES: CLASSIFICATION:
  • jel: E43
  • jel: G12
  • jel: G13
  • lcc: HG136 .R45 no.9619
IDENTIFIERS:
  • oclc: 35740773
  • fip:fednrp:9619:
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