Estimating the Cox, ingersoll and Ross model of the term structure: a multivariate approach

Abstract

In this paper we suggest a new methodology to estimate the Cox, Ingersoll and Ross model of the term structure. The approach is based on a multivariate non-linear least squares procedure, which allows us to simultaneously take into account the cross-sectional relations which exist among bond prices at each instant of time and the dynamics of each bond price over time. The methodology involves the use of a fairly simple econometric specification and is developed to deal with both the case of independently and identically distributed error terms and the case of autocorrelated error terms. We estimate and test the model using nominal prices of Italian Treasury bonds.