Testing Linearity in Term Structures

Chiara Peroni (chiara.peroni@statec.etat.lu)

MPRA Paper from University Library of Munich, Germany

Abstract: Recent empirical studies suggests that affine models, a popular framework to analyse term structures of interest rates, are misspecified. This evidence is mainly based on time series properties of the data. This article re-examines this controversy, by investigating both cross-sectional and dynamic properties of affine models. To do so, it applies robust non-parametric techniques to two different sets of financial data, which contain information on the UK and US yield curve. The analysis shows the strong non-linearity in the relationship of yields to the US and UK short rate. The non-linear pattern is concave in the state variable, and increasing with respect to the maturity, for both countries. Linear and non-linear specifications are then compared by means of a formal statistical criterion, the Generalised Likelihood-Ratio test statistics, which confirms evidence against the linear specification.

Keywords: interest rates; term structure; affine models; non-linearity; non-parametric regression. (search for similar items in EconPapers)
JEL-codes: C14 E43 G12 (search for similar items in EconPapers)
Date: 2009-07-13
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Working Paper: Testing Linearity in Term Structures (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16471

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