STATE-SPACE ESTIMATION OF MULTI-FACTOR MODELS OF THE TERM STRUCTURE: AN APPLICATION TO

This paper estimates multi-factor versions of the Vasicek (1977) and the Cox, Ingersoll and Ross (CIR 1985) models of the term structure of interest rates using zero-coupon Government of Jamaica bond prices. Statistical tests conrm that the two-factor CIR-model best accounts for the dynamics of the term structure. The empirical analysis reveal that the level of the short rate exhibits strong and smooth mean reversion and the existence of a large and signicant risk premium that increases with time to maturity. Based on estimated factor loadings, the unobserved short rate has a signicant impact on the short end of the yield curve but a relatively minimal impact on the long end