Transcription of A New Perspective on Gaussian Dynamic Term Structure …
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A New Perspective on Gaussian Dynamic Term Structure …
ANew Perspective on Gaussian DynamicTerm Structure ModelsScottJoslinMIT Sloan School of ManagementKenneth J. SingletonGraduate School of Business, Stanford University, and NBERH aoxiang ZhuGraduate School of Business, Stanford UniversityInany canonical Gaussian Dynamic term Structure model (GDTSM), the conditional fore-casts of the pricing factors are invariant to the imposition of no-arbitrage restrictions. Thisinvariance is maintained even in the presence of a variety of restrictions on the factorstructure of bond yields. To establish these results, we develop a novel canonicalGDTSMin which the pricing factors are observable portfolios of yields. For our normalization,standard maximum likelihood algorithms converge to the global optimum almost instanta-neously.
The Review of Financial Studies / v 24 n 3 2011 conditional covariance matrix of yields factors from the VAR. That is, given ΣP, the entire cross-section of bond yields in anN-factorGDTSM is fully de- termined by only the N +1 parameters r
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