A re-examination of the empirical performance of the Longstaff and Schwartz two-factor term structure model using real yield data. (August 2013)

• Record Type: Journal Article
• Authors: Faff, Robert; Treepongkaruna, Sirimon
• Is Part Of: Australian journal of management. Volume 38:Number 2(2013)
• Page Start: 333
• Page End: 352
• Publication Date: 2013-08
• Subjects: Longstaff–Schwartz two-factor model -- multi-country test -- real yield data -- term structure; E43 -- G15; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896212443691
• Languages: English
• ISSNs: 0312-8962

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.