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*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

2 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 - Aug 2013
Externally publishedYes

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