Can affine models match the moments in bond yields?

Feldhutter, P (2015) Can affine models match the moments in bond yields? Quarterly Journal of Finance, 6 (2). ISSN 2010-1392

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This paper examines the ability of three-factor affine term structure models with essentially, extended, and semi-affine risk premium specifications to capture the dynamics of bond excess returns, yield volatility and higher order moments in yields. Extended affine models can best capture the time-variation in excess returns and yield volatility simultaneous. However, none of the three-factor models can fully match bond return predictability and yield volatility jointly. Extended affine models are more restricted in the ability to price bonds because of necessary parameter restrictions — the so-called Feller condition — and essentially affine and semi-affine models are therefore better suited for pricing purposes.

Item Type: Article
Additional Information: © 2016 World Scientific Publishing Co Pte Ltd
Subjects: F > Financial risk
R > Risk
Subject Areas: Finance
DOI: 10.1142/S2010139216500099
Date Deposited: 17 Nov 2016 13:15
Last Modified: 17 Nov 2016 14:05

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