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Beyond Single-Factor Affine Term Structure Models

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Abstract

This article proposes a new approach to testing for the hypothesis of a single priced risk factor driving the term structure of interest rates. The method does not rely on any parametric specification of the state variable dynamics or the market price of risk. It simply exploits the constraint imposed by the no-arbitrage condition on instantaneous expected bond returns. In order to achieve our goal, we develop a Kolmogorov-Smirnov test and apply it to data on Treasury bills and bonds for both the United States and Spain. We find that the single risk factor hypothesis cannot be rejected for either dataset. Copyright 2004, Oxford University Press.

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  • Eva Ferreira, 2004. "Beyond Single-Factor Affine Term Structure Models," Journal of Financial Econometrics, Oxford University Press, vol. 2(4), pages 565-591.
    • Handle: RePEc:oup:jfinec:v:2:y:2004:i:4:p:565-591
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbh022
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    Cited by:

    1. Ferreira, Eva & Gil-Bazo, Javier & Orbe, Susan, 2008. "Nonparametric estimation of conditional beta pricing models," DEE - Working Papers. Business Economics. WB wb082403, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    2. Isabel Casas & Eva Ferreira & Susan Orbe, 2021. "Time-Varying Coefficient Estimation in SURE Models. Application to Portfolio Management," Journal of Financial Econometrics, Oxford University Press, vol. 19(4), pages 707-745.
    3. Lourdes Gómez-Valle & Julia Martínez-Rodríguez, 2010. "Improving the term structure of interest rates: two-factor models," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 275-287.

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