Gaussian Estimation and Forecasting of Multi-Factor Term Structure Models with an Application to Japan and the United Kingdom

Economics

Further details

In this paper we extend the discrete model first used in empirical finance by Brennan and Schwartz (1979) to estimate their two-factor term structure to estimate other term structure models using the recent assumption used in Nowman (1997) for single factor models. Following Nowman (1997) we use the exact Gaussian estimation methods of Bergstrom (1983, 1985, 1986, 1997) to estimate two factor versions of the CKLS, Vasicek and CIR models. We estimate the models using monthly UK and Japanese interest rate data. Our results indicate that the estimation method works well in practice and that the Vasicek model provides the best fit for Japan and the CIR model for the U.K.