Estimating the term structure with linear regressions: Getting to the roots of the problem

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JournalJournal of Financial Econometrics
DateAccepted/In press - 10 Sep 2019
Original languageEnglish

Abstract

Linear estimators of the affine term structure model are inconsistent since they cannot reproduce the factors used in estimation. This is a serious handicap empirically, giving a worse fit than the conventional ML estimator that ensures consistency. We show that a simple self-consistent estimator can be constructed using the eigenvalue decomposition of a regression estimator. The remaining parameters of the model follow analytically. Estimates from this model are virtually indistinguishable from that of the ML estimator. We apply the method to estimate various models of U.S. Treasury yields. These exercises greatly extend the range of models that can be estimated.

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