Modeling the joint term structure of interest rates in the United States and the European Union, the two largest economies in the world, is extremely important in international finance. In this paper, we provide both theoretical and empirical analysis of multi-factor joint affine term structure...

The numerous empirical studies on affine term structure models have primarily focused on the in-sample fit of historical bond yields and ignored the out-of-sample forecast of future bond yields. Based on an omnibus nonparametric procedure for density forecast evaluation developed in this paper,...

We extend the maximum likelihood estimation method of Ait-Sahalia (2002) for time-homogeneous diffusions to time-inhomogeneous ones. We derive a closed-form approximation of the likelihood function for discretely sampled time-inhomogeneous diffusions, and prove that this approximation converges...

We propose two nonparametric transition density-based speciÞcation tests for continuous-time diffusion models. In contrast to marginal density as used in the literature, transition density can capture the full dynamics of a diffusion process, and in particular, can distinguish processes with...

In this paper, we develop a new optimization model for capital rationing with uncertain project returns. Our model maximizes the probability of meeting a pre-defined target return by selecting a feasible set of projects subject to budget constraints in multiple time periods. We employ a...

We examine the predictive power of the CDS-bond basis for future corporate bond returns. We find that residual basis, the part of the CDS-bond basis that cannot be explained by a wide range of market frictions such as counterparty risk, funding risk, and liquidity risk, strongly negatively...

We study the time-varying nature of US monetary policies summarized by the Taylor rule based on a continuous-time regime-switching term structure model. In this model, the spot rate follows the Taylor rule and government bonds at different maturities are priced by no-arbitrage. We allow the...

We propose two nonparametric specification tests for continuous-time models based on transition density, which unlike the marginal density used in the literature, can capture the full dynamics of a continuous-time process. To improve the finite sample performance of nonparametric methods, we...

We characterize the dynamics of the U.S. short-term interest rate using a Markov regime switching model. Using a test developed by Garcia (1998), we show that there are two regimes in the data: In one regime, the short rate behaves like a random walk with low volatility; in another regime, it...