TY - JOUR
T1 - A re-examination of the empirical performance of the Longstaff and Schwartz two-factor term structure model using real yield data
AU - Faff, Robert
AU - Treepongkaruna, Sirimon
PY - 2013
Y1 - 2013
N2 - In this study, we apply the Longstaff and Schwartz (1992) two-factor term structure model to real yields across eight countries. As such, we improve on many prior studies that have inappropriately tested this formulation using nominal yield data. We use the generalized method of moments to test the cross-sectional restrictions imposed by the Longstaff and Schwartz model, as well as the Cox-Ingersoll-Ross one-factor model. Further, we compare the forecasting ability from both models. Our findings support the superiority of the two-factor model. We confirm general reliability of prior research in this area, despite the unfortunate reliance on nominal data in such earlier tests.
AB - In this study, we apply the Longstaff and Schwartz (1992) two-factor term structure model to real yields across eight countries. As such, we improve on many prior studies that have inappropriately tested this formulation using nominal yield data. We use the generalized method of moments to test the cross-sectional restrictions imposed by the Longstaff and Schwartz model, as well as the Cox-Ingersoll-Ross one-factor model. Further, we compare the forecasting ability from both models. Our findings support the superiority of the two-factor model. We confirm general reliability of prior research in this area, despite the unfortunate reliance on nominal data in such earlier tests.
KW - economics
KW - interest rates
KW - monetary policy
UR - http://handle.uws.edu.au:8081/1959.7/uws:30803
U2 - 10.1177/0312896212443691
DO - 10.1177/0312896212443691
M3 - Article
SN - 0312-8962
VL - 38
SP - 333
EP - 352
JO - Australian Journal of Management
JF - Australian Journal of Management
IS - 2
ER -