Direct estimation of the risk neutral factor dynamics of Gaussian term structure models

摘要

This paper proposes panel data tests of Gaussian affine term structure models. Yield curve data for different moments in time are pooled with the factors treated as fixed effects. With fixed effects the time series properties of the price of risk canbe ignored. Results of tests with US interest rate data show that the Gaussian model is able to capture the cross sectional structure of yields as well as unrestricted factor loadings from principal components analysis. However, estimates of the mean reversion parameters in a 3-factor model differ significantly when the model is estimated from yield levels or forward differences, which is inconsistent with the Gaussian model.