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
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: Suggested Citation