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Affine Term Structure Constraints on Euribor data

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  • Giulio Tarditi

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Abstract

This article discusses some modifications to non arbitrage models described by an Ornstein- Uhlenbeck latent process and an affine dynamic system. The empirical analysis refers to Euribor rates, due to the leading role they have in financial markets, but also to help the replicability of the results due to their accessibility and gratuitous nature. The benchmark model belongs to the class of Affine Term Structure Models (ATSM), whom owe their popularity to the success of Duffie and Kan (1996). Nodes have been calculated recursively through the use of the Kalman filter, and hence have the corresponding bayesian interpretation. The proposals differ from traditional models on some constraints posed on certain model specifications that allow to identify different aspects of the term structure. Through a clear identification of the type of contribution that each factor can undertake, it is possible to define probabilistic structures with minimal residuals purified from the dominant systematic residues visible in classic model residuals. Term Structure properties seem to be be identified with greater precision, which in the authors opinion justifies the relaxation of the hypothesis due to the additional constraints. The empirical analysis tries to convey such findings, and reminds of possible evolving paths of this line of work, such as a different specification of the transition process or the relaxation of linear and gaussian nature.

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Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 613.

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Date of creation: Jun 2011
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Handle: RePEc:usi:wpaper:613

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  1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  3. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  4. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
  5. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
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  7. Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March.
  8. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  9. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
  10. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  11. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
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