Discrete-Time Affine Term Structure Models: An ARCH Formulation

International Journal of Risk Assessment and Management, Forthcoming

15 Pages Posted: 20 Jan 2010

See all articles by Mario Maggi

Mario Maggi

University of Pavia - Department of Economics and Management; University of Pavia - Department of Economics and Management

Dean Fantazzini

Moscow School of Economics, Moscow State University; National Research University Higher School of Economics

Alessandro Carta

affiliation not provided to SSRN

Date Written: January 19, 2010

Abstract

Discrete-time Affine Term Structure Models can be expressed in AR(1)- ARCH form, but it is not possible to get a non-negative variance equation only by restricting the parameters. In this paper we use a distribution assumption in order to assure the variance to be non-negative. We present a complete formulation for one-factor and multi-factor models with Inverse Gaussian conditional innovations distribution. Moreover, we derive the log-likelihood functions and implement a two-factor empirical specification analysis both with simulated and US interest rate data. We compare the estimation and forecasting results with an AR(1)-GARCH(1,1) model.

Keywords: Discrete-time Affine Term Structure Models, ARCH, VAR, Maximum Likelihood Estimation, Affine Models, Term Structure Models, Inverse Gaussian

JEL Classification: C32, C51, E43

Suggested Citation

Maggi, Mario and Fantazzini, Dean and Carta, Alessandro, Discrete-Time Affine Term Structure Models: An ARCH Formulation (January 19, 2010). International Journal of Risk Assessment and Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1538952

Mario Maggi (Contact Author)

University of Pavia - Department of Economics and Management ( email )

Via San Felice, 5
Pavia, PV 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

Dean Fantazzini

Moscow School of Economics, Moscow State University ( email )

GSP-2, Leninskie Gory
Moscow, 119992
Russia
+7 495 5105256 (Phone)
+7 495 5105267 (Fax)

HOME PAGE: https://sites.google.com/site/deanfantazzini/

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

HOME PAGE: http://www.hse.ru/org/persons/11532644

Alessandro Carta

affiliation not provided to SSRN ( email )

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