A comparative evaluation of alternative models of the term structure of interest rates |
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| Institution: | 1. Department of Accounting and Finance, The University of Auckland, Auckland, New Zealand;2. Department of Basic Sciences, Semnan Branch, Islamic Azad University, Semnan, Iran;1. Lancaster University Management School, Lancaster, LA1 4YX, United Kingdom;2. Department of Economics, University of Nevada Las Vegas, Las Vegas, NV 89154-6005, United States;3. Department of Economics, State University of New York at Binghamton, Binghamton, NY 13902-6000, United States;4. UiS Business School and Centre for Innovation Research, University of Stavanger, 4036 Stavanger, Norway;1. Institute of Applied Mathematics, Department of Logistics, Wroclaw University of Economics, ul. Komandorska 118/120, 53-345 Wroclaw, Poland;2. Business Economics Group, Wageningen University, Hollandseweg 1, 6706 KN Wageningen, The Netherlands |
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| Abstract: | In the paper alternative models of the term structure of interest rates are classified in two different approaches: the no-arbitrage and the general equilibrium approach. It is maintained that the general equilibrium approach is superior on a theoretical ground for two main reasons: first, relevant variables, such as the spot interest rate and the interest risk-premium, are endogenous; second, the relationship between the real and the financial side of the economy becomes a clear and important element in the understanding of the term structure. As regards the applications, however, the advantages of the general equilibrium over the no-arbitrage approach are not so clear: the major role in the empiricil performance of alternative models is played by their ability to capture volatility. At the current state of the literature, there is no model that outperforms others, in particular on the empirical side. |
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