Recent advances in estimating term-structure models

In the past 10 years, increasingly sophisticated statistical techniques hav e been applied to the estimation of increasingly complex models of the term structure of interest rates. In reviewing this literature, we highlight th e facts that have been established and the key unresolved issues. The data indicate that within a wide range of interest rates, mean reversion in rate s is, at best, weak. Whether mean reversion is stronger for very high or ve ry low levels of rates is an unresolved issue. The absolute volatility of r ates increases as the level of rates increases, but the strength of this ef fect and the role and nature of either stochastic-volatility or regime-swit ching components in rates are still unclear. Unfortunately, these unresolve d issues have important implications for fixed-income option pricing and ri sk measurement, including value-at-risk calculations.