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Staying at Zero with Affine Processes: An Application to Term-Structure Modelling

44 Pages Posted: 15 Mar 2014 Last revised: 24 Aug 2016

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Fulvio Pegoraro

Banque de France - Economics and Finance Research Center; CREST - Laboratoire de Finance et Assurance

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Guillaume Roussellet

New York University (NYU) - Leonard N. Stern School of Business, Volatility Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 2016

Abstract

We build an Affine Term Structure Model that provides non-negative yields at any maturity and that is able to accommodate a short-term rate that stays at the zero lower bound (ZLB) for extended periods of time while longer-term rates feature high volatilities. We introduce these features through a new univariate non-negative affine process called ARG-Zero, and its multivariate affine counterpart (VARG), entailing conditional distributions with a zero- point masses. The affine property of this new class of processes implies both explicit bond pricing and quasi-explicit lift-off probability formulas. We provide an empirical application to Japanese Government Bond (JGB) yields, observed weekly from June 1995 to May 2014 with maturities from six months to ten years. Our four-factor specification is able to closely match yield levels and to capture conditional yield volatilities.

Keywords: Zero Lower Bound, Affine Process, Term-Structure Model, Lift-Off Probabilities

JEL Classification: E43, G12

Suggested Citation

Monfort, Alain and Pegoraro, Fulvio and Renne, Jean-Paul and Roussellet, Guillaume, Staying at Zero with Affine Processes: An Application to Term-Structure Modelling (January 2016). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2408495 or http://dx.doi.org/10.2139/ssrn.2408495

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Fulvio Pegoraro

Banque de France - Economics and Finance Research Center ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01 France
France
00.33.(0)1.42.92.91.67 (Phone)
00.33.(0)1.42.92.48.18 (Fax)

CREST - Laboratoire de Finance et Assurance ( email )

15, Boulevard Gabriel Péri
Bureau 1112 - Timbre J320
92245 Malafokk Cedex France, 92245
France
00.33.(0)1.41.17.77.97 (Phone)
00.33.(0)1.41.17.76.66 (Fax)

HOME PAGE: http://www.crest.fr/pageperso/pegoraro/pegoraro.htm

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Guillaume Roussellet (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Volatility Institute ( email )

44 West 4th Street
New York, NY NY 10012
United States
646 881 3460 (Phone)

HOME PAGE: http://sites.google.com/a/stern.nyu.edu/groussellet/

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