Estimating and Testing an Exponential - A ne

In general, the interest rate is not directly observable in the nancial market. Short term interest rates are quoted in the money market for maturities up to approximately one year, but longer term interest rates are traded only indirectly through the bond market. In this paper the spot interest rate is described by a bivariate stochastic differential equation state space model that gives rise to an exponential-aane term structure model. We propose a new maximum likelihood method for estimating parameters and interest rates in stochastic diierential equations from observed coupon-bearing bond prices. The method utilizes continuous-discrete second order nonlinear ltering techniques. As a preliminary analysis the method is applied to a cross-section of time series of Danish government bond prices.