The Fallacy of The Cox, Ingersoll & Ross Model. An empirical study on US bond data

Abstract

This paper examines the performance of the original one-factor Cox, Ingersoll & Ross model during a contemporary dataset using an OLS procedure. The model is fundamental for many nancial models used for investment decisions, it is therefore important to validate its performance during current market conditions characterized by low interest rates. The study is performed on a dataset of US Treasury Notes traded during the period 2005/01/01 - 2016/12/31 and contains 663 unique bonds. In accordance with previous studies, it is concluded that the estimated parameters are unstable and that the model performs worse during periods when short term interest rates are close to zero. Consequently, the assumption of positive interest rates might be too strong.