Disciplines
Finance and Financial Management
Abstract
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.
Recommended Citation
Leippold, Markus and Wu, Liuren, "Design and Estimation of Quadratic Term Structure Models" (2001). CRIF Working Paper series. 23.
https://research.library.fordham.edu/crif_working_papers/23
