TITLE:
Identification and Estimation of Gaussian Affine Term Structure Models with Regime Switching
AUTHORS:
Gang Wang
KEYWORDS:
Regime Switching, GDTSMs, Identification, Estimation
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.4 No.3,
April
22,
2014
ABSTRACT: We establish that [1]’s parameters are universally unidentified and a subset of their parameterization is over identified. As a solution to the problem with the identifiability, we propose a new representation of double-regime three-factor GDTSMs whose parameters are just-identified when the number of the pricing-with-error yields equals 2. This new parametrization has another advantage over [2] in that we can back out Q parameters andP parameters separately and make the estimation of structural parameters easier. Finally, we show that regime-switching three-factor arbitrage-free dynamic Nelson-Siegel model is a restricted special case of our model.