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A Base Model for Multifactor Specifications of the Term Structure

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  • Andrea Berardi
  • Marcello Esposito

Abstract

type="main" xml:lang="en"> In this article, we aim to show that most of the recent multifactor specifications of the term structure can be traced back to a common general equilibrium model, based on an economy of the Cox, Ingersoll and Ross type. This base model of the term structure has a very general form and includes both square root and Gaussian dynamics of the underlying state variables. We establish a direct link among the state variables used in the different specifications of many multifactor models and analyse the structure of the resultant implied relationships. This technique has relevant implications from a practical point of view, as it can allow one to recover from the estimated coefficients of one model the implied value of the coefficients of other models. Moreover, it provides a way of recovering from the term structure the values of such unobservable variables as the real short rate and the expected inflation rate. (J.E.L.: E43, G12).

Suggested Citation

  • Andrea Berardi & Marcello Esposito, 1999. "A Base Model for Multifactor Specifications of the Term Structure," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(2), pages 145-170, July.
    • Handle: RePEc:bla:ecnote:v:28:y:1999:i:2:p:145-170
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00008
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    Cited by:

    1. Leo Krippner, 2008. "A Macroeconomic Foundation for the Nelson and Siegel Class of Yield Curve Models," Research Paper Series 226, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Darrel Duffie & Damir Filipović & Walter Schachermayer, 2002. "Affine Processes and Application in Finance," NBER Technical Working Papers 0281, National Bureau of Economic Research, Inc.
    3. Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato.
    4. Leo Krippner, 2003. "Modelling the Yield Curve with Orthonomalised Laguerre Polynomials: An Intertemporally Consistent Approach with an Economic Interpretation," Working Papers in Economics 03/01, University of Waikato.
    5. Leo Krippner, 2005. "Investigating the Relationships between the Yield Curve, Output and Inflation using an Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models," Working Papers in Economics 05/02, University of Waikato.
    6. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    7. Leo Krippner, 2005. "A New Framework for Yield Curve, Output and Inflation Relationships," Working Papers in Economics 05/07, University of Waikato.

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