Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model
Francis Longstaff and
Eduardo S Schwartz
Journal of Finance, 1992, vol. 47, issue 4, 1259-82
The authors develop a two-factor general equilibrium model of the term structure. The factors are the short-term interest rate and the volatility of the short-term interest rate. The authors derive closed-form expressions for discount bonds and study the properties of the term structure implied by the model. The dependence of yields on volatility allows the model to capture many observed properties of the term structure. The authors also derive closed-form expressions for discount bond options. The authors use Hansen's generalized method of moments framework to test the cross-sectional restrictions imposed by the model. The tests support the two-factor model. Copyright 1992 by American Finance Association.
References: Add references at CitEc
Citations View citations in EconPapers (141) Track citations by RSS feed
Downloads: (external link)
http://links.jstor.org/sici?sici=0022-1082%2819920 ... O%3B2-J&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:47:y:1992:i:4:p:1259-82
Ordering information: This journal article can be ordered from
Access Statistics for this article
More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Series data maintained by Wiley-Blackwell Digital Licensing ().