A Multifactor, Nonlinear, Continuous-Time Model of Interest Rate Volatility / Jacob Boudoukh, Matthew Richardson, Richard Stanton, Robert F. Whitelaw.

Format:

Book

Author/Creator:

Boudoukh, Jacob.

Contributor:

National Bureau of Economic Research.

Richardson, Matthew.

Stanton, Richard.

Whitelaw, Robert F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7213.

NBER working paper series no. w7213

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

This paper presents a general, nonlinear version of existing multifactor models, such as Longstaff and Schwartz (1992). The novel aspect of our approach is that rather than choosing the model parameterization out of thin air,' our processes are generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short- and long-end of the term structure for a general two-factor diffusion process for interest rates, a major finding is that the volatility of interest rates is increasing in the level of interest rates only for sharply upward sloping term structures. In fact, the slope of the term structure plays a larger role in determining the magnitude of the diffusion coefficient. As an application, we analyze the model's implications for the term structure of term premiums.

Notes:

Print version record

July 1999.