| Abstract: | The Duffie and Kan (1966) model, which can be considered as the most general affine term structure formulation, was originally specified in terms of risk-adjusted stochastic processes for its state variables. The goal of the present paper is to derive a Duffie and Kan (1966) model specification under the physical probability measure that is compatible with the formulation given by the authors under the equivalent martingale ( money market account ) measure. For that purpose, the Duffie and Kan (1966) model will be fitted into a general equilibrium monetary framework. The resulting analytical solution for the vector of factor risk premiums enables the econometric estimation of the model parameters using a time-series or a panel-data approach, and nests, as special cases, several other specifications already proposed in the literature.Received: November 2002, Accepted: February 2004, JEL Classification:
E43, G11, G12Financial support by FCTs research grant PRAXISXXI/BD/5712/95 is gratefully acknowledged. |
