Kalman Filtering of Generalized Vasicek Term Structure Models

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Abstract
We present a subclass of Langetieg's (1980) linear Gaussian models of the term structure. The bond price is derived in terms of a finite set of state variables with correlated innovations. The subclass contains a reformulation of the double-decay model of Beaglehole and Tenney (1991), enabling us to clarify interpretation of their parameters. We apply Kalman filtering to a state space formulation of the model, allowing measurement errors in the data. One-, two-, and three-factor models are estimated on U.S. data from 1987-1996 and the results indicate the subclass of models can fit the U.S. term structure.

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