Linear Factor Models and the Term Structure of Interest Rates

The aim of this paper is the determination of the term structure of interest rates from observations of the prices of fixed-income bonds. We first introduce factor models to describe the evolution of prices of zero-coupon bonds, and we derive the constraints induced by the arbitrage free condition. The second part of the paper is concerned with the statistical problems: identification, parameter estimation, test of the arbitrage free hypothesis, valuation of various financial assets.