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Specification Analysis of Affine Term Structure Models

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  • Qiang Dai
  • Kenneth J. Singleton

Abstract

This paper explores the structural differences and relative goodness‐of‐fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade‐off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade‐off is formalized by our classification of N‐factor affine family into N+1 non‐nested subfamilies of models. Specializing to three‐factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:5:p:1943-1978
    DOI: 10.1111/0022-1082.00278
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