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Kalman Filtering of Generalized Vasicek Term Structure Models

Published online by Cambridge University Press:  06 April 2009

Simon H. Babbs  and
K. Ben Nowman
Simon H. Babbs
Affiliation:
First National Bank of Chicago, 1 Triton Square, London NW1 3FN, U.K., University of Warwick
K. Ben Nowman
Affiliation:
City University Business School, Frobisher Crescent, London EC2Y 8HB, U.K.
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Abstract

We present a subclass of Langetieg's (1980).linear Gaussian models of the term structure. The bond price is derived in terms of a finite set of state variables with correlated innovations. The subclass contains a reformulation of the double-decay model of Beaglehole and Tenney (1991), enabling us to clarify interpretation of their parameters. We apply Kalman filtering to a state space formulation of the model, allowing measurement errors in the data. One-, two-, and three-factor models are estimated on U.S. data from 1987–1996 and the results indicate the subclass of models can fit the U.S. term structure.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 1 , March 1999 , pp. 115 - 130
Copyright
Copyright © School of Business Administration, University of Washington 1999

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