Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model

NEIL D. PEARSON, TONG‐SHENG ‐S SUN

Research output: Contribution to journalArticle

Abstract

We propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae, using data on both discount and coupon bonds. The method is applied to an extension of a two‐factor model due to Cox, Ingersoll, and Ross (1985; CIR). Our results show that estimates based on only bills imply unreasonably large price errors for longer maturities. We reject the original CIR model using a likelihood ratio test, and conclude that the extended CIR model also fails to provide a good description of the Treasury market. 1994 The American Finance Association

Original languageEnglish (US)
Pages (from-to)1279-1304
Number of pages26
JournalThe Journal of Finance
Volume49
Issue number4
DOIs
StatePublished - Sep 1994
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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