Design and Estimation of Quadratic Term Structure Models

Markus Leippold () and Liuren Wu ()

Finance from EconWPA

Abstract: We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two­factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.

Keywords: quadratic model; term structure; positive interest rates; humps; expectation hy­pothesis; GMM; caps and floors. (search for similar items in EconPapers)
JEL-codes: G12 G13 E43 (search for similar items in EconPapers)
Date: 2002-08-30
Note: Type of Document - pdf; prepared on MikTex; to print on postscript; pages: 49 ; figures: included. produced via dvipdfm
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0207014

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