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Term Structure Dynamics in Theory and Reality

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Author Info
Qiang Dai
Kenneth Singleton
Abstract

This article is a critical survey of models designed for pricing fixed-income securities and their associated term structures of market yields. Our primary focus is on the interplay between the theoretical specification of dynamic term structure models and their empirical fit to historical changes in the shapes of yield curves. We begin by overviewing the dynamic term structure models that have been fit to treasury or swap yield curves and in which the risk factors follow diffusions, jump-diffusion, or have "switching regimes." Then the goodness-of-fit of these models is assessed relative to their abilities to (i) match linear projections of changes in yields onto the slope of the yield curve; (ii) match the persistence of conditional volatilities, and the shapes of term structures of unconditional volatilities, of yields; and (iii) to reliably price caps, swaptions, and other fixed-income derivatives. For the case of defaultable securities we explore the relative fits to historical yield spreads. Copyright 2003, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhg010
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 16 (2003)
Issue (Month): 3 (July)
Pages: 631-678
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Handle: RePEc:oup:rfinst:v:16:y:2003:i:3:p:631-678

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  3. Marco Realdon, 2007. "Extended-Gaussian Term Structure Models and Credit Risk Applications," Discussion Papers 07/27, Department of Economics, University of York. [Downloadable!]
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  5. Lettau, Martin & Wachter, Jessica, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-based Explanation of the Value Premium," CEPR Discussion Papers 4921, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Pierre Collin-Dufresne & Christopher S. Jones & Robert S. Goldstein, 2004. "Can Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatility," NBER Working Papers 10756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Duarte, Jefferson., 2003. "Evaluating an Alternative Risk Preference in Affine Term Structure Models," Finance Lab Working Papers flwp_49, Finance Lab, Ibmec São Paulo. [Downloadable!]
  10. Marco Realdon, 2007. "A Two Factor Black-Karasinski Credit Default Swap Pricing Model (forthcoming in the Icfai Journal of Derivatives Markets, Vol IV, No 4, October 2007; all copyrights rest with the Icfai University Pres," Discussion Papers 07/25, Department of Economics, University of York. [Downloadable!]
  11. Wei Xiong & Hongjun Yan, 2006. "Heterogeneous Expectations and Bond Markets," NBER Working Papers 12781, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Yong Zeng & Shu Wu, 2004. "A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk," Econometric Society 2004 North American Summer Meetings 304, Econometric Society. [Downloadable!]
  13. Michael Gallmeyer & Burton Hollifield & Stanley E. Zin, 2005. "Taylor Rules, McCallum Rules and the Term Structure of Interest Rates," NBER Working Papers 11276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Peter D Spencer, . "Coupon Bond Valuation with a Non-Affine Discount Yield Model," Discussion Papers 03/16, Department of Economics, University of York. [Downloadable!]
  15. Michael Brennan & Yihong Xia, 2004. "International Capital Markets and Foreign Exchange Risk," University of California at Los Angeles, Anderson Graduate School of Management 1251, Anderson Graduate School of Management, UCLA. [Downloadable!]
  16. Marco Realdon, 2006. "Quadratic Term Structure Models in Discrete Time," Discussion Papers 06/01, Department of Economics, University of York. [Downloadable!]
  17. Georg Mosburger & Paul Schneider, 2005. "Modelling International Bond Markets with Affine Term Structure Models," Finance 0509003, EconWPA. [Downloadable!]
  18. Igor Grubisic & Raoul Pietersz, 2005. "Efficient Rank Reduction of Correlation Matrices," Finance 0502007, EconWPA. [Downloadable!]
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  19. Shu Wu, 2005. "Interest Rate Risk and the Forward Premium Anomaly in Foreign Exchange Markets," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200519, University of Kansas, Department of Economics, revised Oct 2005. [Downloadable!]
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  21. Martin Lettau & Jessica Wachter, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium," NBER Working Papers 11144, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Gaspar, Raquel M., 2004. "General Quadratic Term Structures of Bond, Futures and Forward Prices," Working Paper Series in Economics and Finance 559, Stockholm School of Economics. [Downloadable!]
  23. Albanese, Claudio, 2007. "Callable Swaps, Snowballs And Videogames," MPRA Paper 5229, University Library of Munich, Germany, revised 01 Oct 2007. [Downloadable!]
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