Testing linearity in term structures

Chiara Peroni ()

Applied Financial Economics, 2012, vol. 22, issue 8, 651-666

Abstract: This article uses robust nonparametric techniques to investigate both crosssectional and dynamic properties of affine models, a popular framework to analyse Term Structures (TSs) of interest rates. The analysis shows the strong nonlinearity in the relationship of yields to the US and UK short rate. The nonlinear pattern is concave in the state variable, and increasing with respect to the maturity, for both countries. Linear and nonlinear specifications are then compared by means of a formal statistical criterion, the Generalized Likelihood-Ratio (GLR) test statistics, which confirms evidence against the linear specification.

Date: 2012
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Related works:
Working Paper: Testing Linearity in Term Structures (2010)
Working Paper: Testing Linearity in Term Structures (2009)
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DOI: 10.1080/09603107.2011.621882

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