Quadratic Term Structure Models

Theory and Evidence

Dong Hyun Ahn, Robert F. Dittmar, Andrew Ronald Gallant

Research output: Contribution to journalReview article

168 Citations (Scopus)

Abstract

This article theoretically explores the characteristics underpinning quadratic term structure models (QTSMs), which designate the yield on a bond as a quadratic function of underlying state variables. We develop a comprehensive QTSM, which is maximally flexible and thus encompasses the features of several diverse models including the double square-root model of Longstaff (1989), the univariate quadratic model of Beaglehole and Tenney (1992), and the squared-autoregressive-independent-variable nominal term structure (SAINTS) model of Constantinides (1992). We document a complete classification of admissibility and empirical identification for the QTSM, and demonstrate that the QTSM can overcome limitations inherent in affine term structure models (ATSMs). Using the efficient method of moments of Gallant and Tauchen (1996), we test the empirical performance of the model in determining bond prices and compare the performance to the ATSMs. The results of the goodness-of-fit tests suggest that the QTSMs outperform the ATSMs in explaining historical bond price behavior in the United States.

Original languageEnglish (US)
Pages (from-to)243-288
Number of pages46
JournalReview of Financial Studies
Volume15
Issue number1
DOIs
StatePublished - Jan 1 2002

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Quadratic term structure models
Affine term structure models
Bond prices
Admissibility
State variable
Goodness of fit test
Term structure models
Efficient method of moments

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Ahn, Dong Hyun ; Dittmar, Robert F. ; Gallant, Andrew Ronald. / Quadratic Term Structure Models : Theory and Evidence. In: Review of Financial Studies. 2002 ; Vol. 15, No. 1. pp. 243-288.
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Quadratic Term Structure Models : Theory and Evidence. / Ahn, Dong Hyun; Dittmar, Robert F.; Gallant, Andrew Ronald.

In: Review of Financial Studies, Vol. 15, No. 1, 01.01.2002, p. 243-288.

Research output: Contribution to journalReview article

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