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AN EMPIRICAL STUDY OF A NEW CLASS OF NO‐ARBITRAGE‐BASED DISCRETE MODELS OF THE TERM STRUCTURE
Author(s) -
Sim Ah Boon,
Thurston David C.
Publication year - 1996
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1996.tb00227.x
Subject(s) - forward rate , econometrics , volatility (finance) , bond , treasury , economics , term (time) , arbitrage , affine term structure model , yield curve , empirical research , bond valuation , financial economics , mathematics , mathematical economics , interest rate , statistics , finance , physics , archaeology , quantum mechanics , history
We present empirical tests of the new no‐arbitrage‐based term structure paradigm in discrete time. We derive and test empirical specifications for deterministic one‐factor forward rate volatility models and examine the compatibility of these forward rate volatility functions using term structure dynamics. Our estimation technique uses the generalized method of moments and is based on forward bond price deviations. We do not impose restrictions on the market price of risk, and we incorporate all available term structure information. Our data consist of four sets of pure discount bonds derived from the CRSP bond files and U.S. Treasury bill quotes.