NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Identification and Estimation of Gaussian Affine Term Structure Models

James D. Hamilton, Jing Cynthia Wu

NBER Working Paper No. 17772
Issued in January 2012
NBER Program(s):   AP   ME

This paper develops new results for identification and estimation of Gaussian affine term structure models. We establish that three popular canonical representations are unidentified, and demonstrate how unidentified regions can complicate numerical optimization. A separate contribution of the paper is the proposal of minimum-chi-square estimation as an alternative to MLE. We show that, although it is asymptotically equivalent to MLE, it can be much easier to compute. In some cases, MCSE allows researchers to recognize with certainty whether a given estimate represents a global maximum of the likelihood function and makes feasible the computation of small-sample standard errors.

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Published: Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.

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