A re-examination of the empirical performance of the Longstaff and Schwartz two-factor term structure model using real yield data

Robert Faff and Sirimon Treepongkaruna
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Sirimon Treepongkaruna: Accounting and Finance, UWA Business School, Australia

Australian Journal of Management, 2013, vol. 38, issue 2, 333-352

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.

Keywords: Longstaff–Schwartz two-factor model; multi-country test; real yield data; term structure (search for similar items in EconPapers)
JEL-codes: E43 G15 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:38:y:2013:i:2:p:333-352

DOI: 10.1177/0312896212443691

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