Abstract
We characterize the term structure models in which the zero-coupon prices are linear functions of underlying factors. These models are called Linear-price Term Structure Models (LTSM). We provide two types of LTSM where the observable factors predict regimes which are not observed by the investor. These hidden regimes are represented by a Markov chain, which features either an exogenous, or an endogenous dynamics. We illustrate the possible term structure patterns, their evolutions, in particular their ability to stay close to a zero lower bound.
Original language | English |
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Pages (from-to) | 24-41 |
Number of pages | 18 |
Journal | Journal of Empirical Finance |
Volume | 24 |
DOIs | |
Publication status | Published - Dec 2013 |
Keywords
- Linear term structure model
- Hidden Markov chain
- Finite dimensional dependence
- Binding floor
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