The information content in bond model residuals : An empirical study on the belgian bond market

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)685-720
Journal / PublicationJournal of Banking and Finance
Issue number5
Publication statusPublished - May 1997


We estimate daily Vasicek, CIR, and spline models on Belgian data and compare the trading profits that can be made on the basis of their residuals. Abnormal returns, measured using three different benchmarks, are negatively related to once-and twice-lagged mispricing. Buying underpriced bonds and (especially) selling overpriced bonds yields significant abnormal returns even when the trade is delayed by up to five days after observing the mispricing. The traditional spline model overfits the data and is least able to detect mispricing. Large model residuals are more likely to be the result of model misspecification or -estimation than are small or medium-sized residuals. © 1997 Elsevier Science B.V. All rights reserved.

Research Area(s)

  • Bonds, Duration, Market efficiency, One-factor model, Spline