Cross Sectional Versus Time Series Estimation of Term Structure Models: Empirical Results for the Dutch Bond Market

Abstract

In this paper we compare time series and cross section estimates of the well known Vasicek [1977] and Cox, Ingersoll and Ross [1985] term structure models for a dataset of daily bond prices and short term interest rates for the Netherlands. The main conclusion of this paper is the great similarity of the cross sectional estimated term structures of interest between the two models. Using the estimated parameters of both models to value bond options, an almost similar result is obtained. It looks as though bonds are priced as if the spot riksfree rate is random walk. From a time series perspective, we find that the two models also provide similar results. For some maturities the data reject the constant volatility Vasicek model and indicate the presence of the CIR volatility effects.

JEL Classification: F30