Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model

Neil D Pearson and Tong-Sheng Sun

Journal of Finance, 1994, vol. 49, issue 4, 1279-1304

Abstract: The authors propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds. The method is applied to an extension of a two-factor model due to J. C. Cox, J. E. Ingersoll, and S. A. Ross (1985). The authors' results show that estimates based on only bills imply unreasonably large price errors for longer maturities. They reject the original Cox, Ingersoll, and Ross model using a likelihood ratio test and conclude that the extended Cox, Ingersoll, and Ross model also fails to provide a good description of the Treasury market. Copyright 1994 by American Finance Association.

Date: 1994
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