A nonparametric dimension test of the term structure

Gonzalo Rubio and Javier Gil-Bazo

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: This paper addresses the problem of conducting a nonparametric test of the dimension of the state variable vector in a continuous-time term structure model. The paper shows that a bivariate diffusion function of the short rate process is a sufficient condition for the term structure to be driven by two stochastic factors. Using an easy-to-implement kernel smoothing method the number of state variables can be tested under very unrestrictive assumptions. The results suggest that continuous-time models for the US interest rates should contain at least two stochastic factors.

Date: 2001-03
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Journal Article: A Nonparametric Dimension Test of the Term Structure (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb012106

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