A two-factor model of the German term structure of interest rates

Jorge Barros Luís and Nuno Cassola ()
Additional contact information
Jorge Barros Luís: Banco Banif Investimento, 30 - 9004-509 Funchal, Brazil.
Nuno Cassola: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 46, Working Paper Series from European Central Bank

Abstract: In this paper we show that a two-factor constant volatility model provides an adequate description of the dynamics and shape of the German term structure of interest rates from 1972 up to 1998. The model also provides reasonable estimates of the volatility and term premium curves. Following the conjecture that the two factors driving the German term structure of interest rates represent the ex-ante real interest rate and the expected inflation rate, the identification of one factor with expected inflation is discussed. Our estimates are obtained using a Kalman filter and a maximum likelihood procedure including in the measurement equation both the yields and their volatilities. JEL Classification: E43; G12.

Keywords: Expectations hypothesis; term premiums; pricing kernels; affine model. (search for similar items in EconPapers)
Date: Written 2001-03
View list of references View citations in EconPapers

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp046.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20010046

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().