Abstract
AbstractWe present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. We cast the model into a state-space form and extract the three sources of systematic risk from both the US Treasury yields and the US dollar swap rates. We analyze the different dynamic behaviors of the two markets during credit crises and liquidity squeezes.
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