Identification of Maximal Affine Term Structure Models

53 Pages Posted: 12 Jan 2007

See all articles by Pierre Collin-Dufresne

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Abstract

Building on the approach of Duffie and Kan (1996) who use finite maturity yields as the state vector, we propose a new representation of affine models in which the state vector is composed of infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation is more flexible than the maximal model of Dai and Singleton (2000) in that there are more identifiable parameters. We implement this new representation for two different three-factor models. The fact that our state vector can be estimated model-independently from yield curve data presents advantages for the estimation and interpretation of multi-factor models.

Keywords: Term Structure of Interest rates

JEL Classification: G12, G13

Suggested Citation

Collin-Dufresne, Pierre and Jones, Christopher S. and Goldstein, Robert S., Identification of Maximal Affine Term Structure Models. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=956207

Pierre Collin-Dufresne (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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