Long Memory Affine Term Structure Models

61 Pages Posted: 21 Mar 2011 Last revised: 27 Aug 2017

See all articles by Adam Golinski

Adam Golinski

University of York

Paolo Zaffaroni

Imperial College Business School

Date Written: June 23, 2015

Abstract

We develop a Gaussian discrete time essentially affine term structure model with long memory state variables. This feature reconciles the strong persistence observed in nominal yields and inflation with the theoretical implications of affine models, especially for long maturities. We characterise in closed-form the dynamic and cross-sectional implications of long memory for our model. We explain how long memory can naturally arise within the term structure of interest rates, providing a theoretical underpinning for our model. Despite the infinite-dimensional structure that long memory implies, we show how to cast the model in state space and estimate it by maximum likelihood. An empirical application of our model is presented.

Keywords: Term structure, long memory, no arbitrage, state space

JEL Classification: G12, C58, C32

Suggested Citation

Golinski, Adam and Zaffaroni, Paolo, Long Memory Affine Term Structure Models (June 23, 2015). Journal of Econometrics, Vol. 191, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=1787037 or http://dx.doi.org/10.2139/ssrn.1787037

Adam Golinski (Contact Author)

University of York ( email )

Heslington
York, YO1 5DD
United Kingdom

Paolo Zaffaroni

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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