What Drives the Yield Curve?

Dennis Kristensen (UCL)
Wednesday, June 4, 2014 - 10:00am
Mohrenstraße 39, Erhard-Schmidt-Hörsaal

We develop nonparametric tests for term structure dynamics to be driven by a nite number of Markov factors in a continuous-time setting. The tests are based on nonparametric estimators of the model developed under the null of the Markov hypothesis and under the alternative, respectively. We then reject the null if the estimators are statistically dierent from each other. The tests do not rely on particular functional form assumptions and so are able to disentangle the Markov hypothesis from functional form hypotheses. In particular, it allows us to test the hypothesis that the short term interest rate follows a time-homogeneous univariate Markov diusion; such a structure is frequently considered in the term structure literature. In an empirical application, we implement estimators and tests on US term structure data.