A Non-Parametric Dimension Test of the Term Structure

Javier Gil Bazo and Gonzalo Rubio Irigoyen
Authors registered in the RePEc Author Service: Javier Gil-Bazo

No 1988-088X, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: In an economy with multiple sources of risk, the short-term interest rate does not capture all the information that determines the conditional distribution of bond yields. This is also true for path-dependent term structure models. In either case, the current short rate level is not a sufficient statistic for the conditional density of future short rates. This paper studies the empirical relevance of both issues from a time-series nonparametric perspective. The analysis is formulated as a test for the dependence of the short rate drift and diffusion on variables other than the short rate, and exploits Ait-Sahalia, Bickel, and Stocker (2001) dimension reduction method. The paper explores the finite sample performance of the method and applies the test to US interest rate data. Results reject a single-factor Markovian model, although conclusions are sensitive to the choice of additional conditioning variables.

Date: 2002
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Related works:
Journal Article: A Nonparametric Dimension Test of the Term Structure (2004)
Working Paper: A nonparametric dimension test of the term structure (2001)
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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