Abstract

http://ssrn.com/abstract=2242280
 
 

References (55)



 
 

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Risk Premia and Volatilities in a Nonlinear Term Structure Model


Peter Feldhütter


London Business School

Christian Heyerdahl-Larsen


London Business School - Department of Finance

Philipp K. Illeditsch


University of Pennsylvania - Finance Department

September 1, 2016

Review of Finance, Forthcoming

Abstract:     
We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of U.S. Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with unspanned risk premia (URP) and unspanned stochastic volatility (USV).

Number of Pages in PDF File: 74

Keywords: Nonlinear Term Structure Models, Expected Excess Returns, Stochastic Volatility, Unspanned Risk Premia (URP), Unspanned Stochastic Volatility (USV)

JEL Classification: D51, E43, E52, G12


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Date posted: April 1, 2013 ; Last revised: September 10, 2016

Suggested Citation

Feldhütter, Peter and Heyerdahl-Larsen, Christian and Illeditsch, Philipp K., Risk Premia and Volatilities in a Nonlinear Term Structure Model (September 1, 2016). Review of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2242280 or http://dx.doi.org/10.2139/ssrn.2242280

Contact Information

Peter Feldhütter
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
Christian Heyerdahl-Larsen
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
Philipp K. Illeditsch (Contact Author)
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3477 (Phone)

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