Can Affine Models Match the Moments in Bond Yields?

65 Pages Posted: 16 Jul 2006 Last revised: 9 May 2008

Date Written: April 30, 2008

Abstract

In this paper I estimate three-factor essentially (Duffee (2002)) and extended (Cheridito, Filipovic, and Kimmel (2007)) affine models and find that extended models match historical risk premia better and capture time-varying volatility slightly better. I find a tension in matching both the time series and cross-sectional properties of yields: essentially affine models generate historical distributions of yields that are too skewed and leptokurtic, while extended models cannot match the curvature of the yield curve during periods of high volatility. The semi-affine models of Duarte (2004) resolve this tension and as a consequence has the best fit cross-sectionally and in the time series dimension.

Keywords: Affine term structure, Market price of risk, Time-varying risk premium, Time-varying volatility

JEL Classification: E43, G12

Suggested Citation

Feldhütter, Peter, Can Affine Models Match the Moments in Bond Yields? (April 30, 2008). Available at SSRN: https://ssrn.com/abstract=915323 or http://dx.doi.org/10.2139/ssrn.915323

Peter Feldhütter (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
256
Abstract Views
1,135
rank
121,350
PlumX Metrics