The SR Approach: a new Estimation Method for Non-Linear and Non-Gaussian Dynamic Term Structure Models

This paper suggests a new and easy approach to estimate linear and non-linear dynamic term structure models with latent factors. We impose no distributional assumptions on the factors and they may therefore be non-Gaussian. The novelty of our approach is to use many observables (yields or bonds prices) in the cross-section dimension. An important benefit of using many observables in each time period is that the latent factors can be estimated quite accurately using standard regressions, and that parameters can be estimated by standard moment matching methods.