Specification Analysis of Affine Term Structure Models / Qiang Dai, Kenneth J. Singleton.

Format:

Book

Author/Creator:

Dai, Qiang.

Contributor:

National Bureau of Economic Research.

Singleton, Kenneth J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6128.

NBER working paper series no. w6128

Language:

English

Subjects (All):

Geometry, Affine.

Econometric models.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Cambridge : National Bureau of Economic Research, 1997.

Summary:

This paper characterizes, interprets, and tests the over-identifying restrictions imposed in affine models of the term" structure. Letting r(t) = ë Y(t), where Y is an unobserved vector affine process, our analysis proceeds in three steps. First, we show that affine models can be categorized according to the different over-identifying restrictions they impose on (i) ë, and (ii) the parameters of the diffusion matrices. Second, this formulation is shown to be equivalent to a model in which there is a terraced drift structure with one of the state variables being the stochastic long-run mean of r. This equivalence allows direct comparisons of the substantive restrictions on the dynamics of interest rates imposed in CIR-style models and models in which the state variables are the stochastic long-run mean and volatility of r. Third, we compute simulated method of moments estimates of a three-factor affine term structure model, and test the over-identifying restrictions on the joint distribution of long- and short-term interest rates implied by extant affine models of r. We find allowing for correlated factors is key to simultaneously describing the short and long ends of the yield curve. This finding is interpreted in terms of the properties of the risk factors underlying term structure movements.

Notes:

Print version record

August 1997.