A New Perspective on Gaussian Dynamic Term Structure Models
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Author(s)
Joslin, Scott Stephen Walter
Singleton, Kenneth J.
Zhu, Haoxiang
Date Issued
January 2011
Journal
Review of Financial Studies
Publisher
Society for Financial Studies / Oxford University Press
Citation
Joslin, S., K. J. Singleton, and H. Zhu. “A New Perspective on Gaussian Dynamic Term Structure Models.” Review of Financial Studies 24.3 (2011) : 926-970. © The Author 2011
Version
Final published version
Abstract
In any canonical Gaussian dynamic term structure model (GDTSM), the conditional forecasts of the pricing factors are invariant to the imposition of no-arbitrage restrictions. This invariance is maintained even in the presence of a variety of restrictions on the factor structure of bond yields. To establish these results, we develop a novel canonical GDTSM in which the pricing factors are observable portfolios of yields. For our normalization, standard maximum likelihood algorithms converge to the global optimum almost instantaneously. We present empirical estimates and out-of-sample forecasts for several GDTSMs using data on U.S. Treasury bond yields.
MIT Department
Sloan School of Management
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1093/rfs/hhq128
