Beyond Single-Factor Affine Term Structure Models

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 impos...

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Bibliographic Details
Published in:Journal of financial econometrics 2004-10, Vol.2 (4), p.565-591
Main Author: Ferreira, Eva
Format: Article
Language:English
Subjects:
Arbitrage
Bond markets
Diffusion
Econometrics
Estimating techniques
Hypotheses
Interest rates
Risk assessment
Risk factors
Risk premiums
Studies
Variables
Zero coupon bonds
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Summary: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.
ISSN:1479-8409
1479-8417
DOI:10.1093/jjfinec/nbh022