A re-examination of the empirical performance of the Longstaff and Schwartz two-factor term structure model using real yield data

Robert Faff, Sirimon Treepongkaruna

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    Abstract

    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.
    Original languageEnglish
    Pages (from-to)333-352
    Number of pages20
    JournalAustralian Journal of Management
    Volume38
    Issue number2
    DOIs
    Publication statusPublished - 2013

    Keywords

    • economics
    • interest rates
    • monetary policy

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