By Oldrich A. Vasicek and H. Gifford Fong
Journal of Finance 37, No. 2, 339–348, 1982; reprinted in Dynamic Asset-Pricing Models, A.W. Lo (ed.), Cheltenham, G.B.: Edward Elgar Publishing Ltd., 2007.
Term structure of interest rates provides a characterization of interest rates as a function of maturity. It facilitates the analysis of rates and yields such as discussed in Dobson, Sutch, and Vanderford , and provides the basis for investigation of portfolio returns as for example in Fisher and Weil . Term structure can be used in pricing of fixed-income securities (cf., for instance, Houglet ), and for valuation of futures contracts and contingent claims, as in Brennan and Schwartz . It finds applications in analysis of the effect of taxation on bond yields (cf. McCulloch [1975a] and Schaefer 1981), estimation of liquidity premia (cf. McCulloch [1975b]), and assessment of the accuracy of market-implicit forecasts (Fama ). Because of its numerous uses, estimation of the term structure has received considerable attention from researchers and practitioners alike.
A number of theoretical equilibrium models has been proposed in the recent past to describe the term structure of interest rates, such as Vasicek  (Chapter 6 of this volume), Brennan and Schwartz , Langetieg , and Cox, Ingersoll, and Ross . These models postulate alternative assumptions about the ...