Multi-factor Cox-Ingersoll-Ross Models of the Term Structure: Estimates and Tests from a Kalman Filter Model

Chen, Ren-Raw and Louis Scott

The Journal of Real Estate Finance and Economics, 2003, vol. 27, issue 2, pages 143-72

Abstract: This paper presents a method for estimating multi-factor versions of the Cox-Ingersoll-Ross (1985b) model of the term structure of interest rates. The fixed parameters in one, two, and three factor models are estimated by applying an approximate maximum likelihood estimator in a state-space model using data for the U.S. treasury market. A nonlinear Kalman filter is used to estimate the unobservable factors. Multi-factor models are necessary to characterize the changing shape of the yield curve over time, and the statistical tests support the case for two and three factor models. A three factor model would be able to incorporate random variation in short term interest rates, long term rates, and interest rate volatility. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
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Persistent link: http://EconPapers.repec.org/RePEc:kap:jrefec:v:27:y:2003:i:2:p:143-72

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