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A New Perspective on Gaussian Dynamic Term Structure Models

Author(s)
Joslin, Scott Stephen Walter; Singleton, Kenneth J.; Zhu, Haoxiang
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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.
Date issued
2011-01
URI
http://hdl.handle.net/1721.1/64953
Department
Sloan School of Management
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
ISSN
0893-9454
1465-7368

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