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Journal of Financial Econometrics 2004 2(4):565-591; doi:10.1093/jjfinec/nbh022
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Journal of Financial Econometrics, Vol. 2, No. 4, © Oxford University Press 2004; all rights reserved.

Beyond Single-Factor Affine Term Structure Models

Eva Ferreira
     Universidad del País Vasco

Javier Gil-Bazo
     Universidad Carlos III de Madrid

Address correspondence to Javier Gil-Bazo, Departamento de Economía de la Empresa, Universidad Carlos III de Madrid, c/Madrid 126, 28903 Getafe, Madrid (Spain), or e-mail: javier.gil.bazo{at}uc3m.es.

This article proposes a new approach to testing for the hypothesis of a single priced risk factor driving the term structure of interest rates. The method does not rely on any parametric specification of the state variable dynamics or the market price of risk. It simply exploits the constraint imposed by the no-arbitrage condition on instantaneous expected bond returns. In order to achieve our goal, we develop a Kolmogorov-Smirnov test and apply it to data on Treasury bills and bonds for both the United States and Spain. We find that the single risk factor hypothesis cannot be rejected for either dataset.

KEYWORDS: bond risk premiums, Kolmogorov-Smirnov test, nonparametric estimation, single-factor term structure models

Received June 5, 2002; revised July 30, 2003; accepted June 15, 2004


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