Empirical Analysis of the Yield Curve: The Information in the Data Viewed through the Window of Cox, Ingersoll, and Ross

Authors

  • Christopher G. Lamoureux,

  • H. Douglas Witte

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    • Lamoureux is from the University of Arizona, and Witte is from the University of Missouri. The authors thank John Cochrane, Qiang Dai, Rick Green, Dan Houser, René Stulz, and an anonymous referee as well as participants of seminars at the University of Arizona, University of California at San Diego, University of California at Riverside, University of Chicago, University of Illinois, University of Southern California, and University of Wisconsin, Duke University, Michigan State University, Northwestern University, Stanford University, and Washington University.

ABSTRACT

This paper uses recent advances in Bayesian estimation methods to exploit fully and efficiently the time-series and cross-sectional empirical restrictions of the Cox, Ingersoll, and Ross model of the term structure. We examine the extent to which the cross-sectional data (five different instruments) provide information about the model. We find that the time-series restrictions of the two-factor model are generally consistent with the data. However, the model's cross-sectional restrictions are not. We show that adding a third factor produces a significant statistical improvement, but causes the average time-series fit to the yields themselves to deteriorate.

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