Presenter: Jorge Hansen, AU

Title: The impact of curve-fitting procedure on estimation and testing of term structure models

Abstract: An empirical analysis of interest rates is generally split into an initial yield fitting step and a subsequent model estimation step. We study the impact of the fitting procedure used on the inference in the estimation step, such as on the fit of a particular dynamic term structure model or tests for arbitrage opportunities. We cast the analysis into the Heath-Jarrow-Morton framework and provide an empirical application to US Treasury coupon bond data. We find that the yield curve used in the fitting step, and, in particular, the consistency between the shape of the yield curve and the dynamic term structure model used in the estimation step, has a significant impact on the conclusions drawn from the analysis.

Organizers: Stefan Hirth and Anders Merrild Posselt