Recent Advances in Estimating Term-Structure Models

David A. Chapman, Neil D. Pearson

Research output: Contribution to journalArticlepeer-review

Abstract

In the past 10 years, increasingly sophisticated statistical techniques have been applied to the estimation of increasingly complex models of the term structure of interest rates. In reviewing this literature, we highlight the facts that have been established and the key unresolved issues. The data indicate that within a wide range of interest rates, mean reversion in rates is, at best, weak. Whether mean reversion is stronger for very high or very low levels of rates is an unresolved issue. The absolute volatility of rates increases as the level of rates increases, but the strength of this effect and the role and nature of either stochastic-volatility or regime-switching components in rates are still unclear. Unfortunately, these unresolved issues have important implications for fixed-income option pricing and risk measurement, including value-at-risk calculations.

Original languageEnglish (US)
Pages (from-to)77-95
Number of pages19
JournalFinancial Analysts Journal
Volume57
Issue number4
DOIs
StatePublished - Jan 1 2001

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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