A NONPARAMETRIC DIMENSION TEST OF THE TERM STRUCTURE
This paper addresses the problem of conducting a nonparametric test of the dimension of the state variable vector in a continuous-time term structure model. The paper shows that a bivariate diffusion function of the short rate process is a sufficient condition for the term structure to be driven by two stochastic factors. Using an easy-to-implement kernel smoothing method the number of state variables can be tested under very unrestrictive assumptions. The results suggest that continuous-time models for the US interest rates should contain at least two stochastic factors.
Year of publication: |
2001-03
|
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Authors: | Gil-Bazo, Javier ; Rubio, Gonzalo |
Institutions: | Departamento de EconomÃa de la Empresa, Universidad Carlos III de Madrid |
Saved in:
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